Question

Suppose the reserve requirement is currently 20%. Instructions: Enter your answers as a whole number. a. Assume Second Bank has deposits of $300 million. Calculate the required reserves for Second Bank. $ million b. At the end of the day, Second Bank has $65 million of reserves. Will Second Bank be a borrower or lender in the federal funds market? Second Bank will reserves of $ million in the federal funds market.

Answer 1

Answer:

a.) required reserves = $60 million

b.) Since second bank has reserve of $65 million but needed only $60 million so the bank can LEND reserves of $5 million in the federal funds market.

Explanation:

Step 1. Given information.

• Reserve requirement 20%

• Second bank has deposits of 300 million.

• At the end second bank has $65 million.

• Only need $60 million.

Step 2. Formulas needed to solve the exercise.

Required reserves = reserve requirement * deposits Second Bank

Step 3. Calculation and Step 4. Solution.

a.) required reserves = (20/100) x $300 million = $60 million

b.) Since second bank has reserve of $65 million but needed only $60 million so the bank can LEND reserves of $5 million in the federal funds market.