Currently a community bank has $45,000 in reserves, demand deposits of $200,000,

Question

Currently a community bank has $45,000 in reserves, demand deposits of $200,000, and loans of $145,000. It unexpectedly receives an inflow of deposits of $50,000 into checking accounts and another $25,000 into time deposits. Current reserve requirements on demand deposits and time deposits are 10 percent and 3 percent, respectively. What is the motivation for having a lower reserve requirement for time deposits relative to demand deposits? What is the bank’s reserve position? What is the maximum dollar amount of loans the bank could make?

Explanation / Answer

In order to have a lower reserve requirement :

Time deposits : Certificate of Deposit , one should deposit money in the bank and should let it be there for a long period of time in exchange of higher rate of interest otherwise there will be penalty for withdrawal because they are less risky to run on deposit

Total Reserves = $ 45000 + $ 50000 +$ 25000 = $ 120,000

Excess Reserves = Total Reserves - Required Reserves

= 120000 - 10 % ( 200000 + 50000) + 3 % 25000

= 120000 - 25750

= $ 94250

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