Question

Assume that the required reserve ratio is 5 percent. If a commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits, then its excess reserves equal:
(A) 0 million
(B) 2 million
(C) 5 million
(D) 6 million

Answer 1

Answer:

The correct answer is option B.

Explanation:

The required reserve ratio is 5 percent.

A commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits.  

The required reserves

= $Required\ reserve\ ratio\ \times\ checkable\ deposits$

= $0.05\ \times\ \ 60 million$

= 3 million

The total reserves are the amount in the vault and the deposits at the fed. So, the total reserves are $5 million.  

The excess reserves are

= $5 million - $3 million

= $2 million