Question

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be:

Answer 1

Answer: 10%

Explanation:

Amount deposited = 5000

Amount which can be Lent out = 2500

The reserve requirement may be explained as a certain percentage of a commercial bank's deposit that must be held in reserve, this is usually a directive placed on the commercial banks by the central bank of the nation.

The reserve requirement is calculated by finding the proportion of the difference between the amount deposited and the maximum amount that can be Lent out to the total deposited amount.

Mathematically,

Reserve requirement =[ (deposit amount - amount that can be Lent out) / deposit amount] × 100

Reserve requirement : ([(5000- 4500) / 5000] × 100)%

= (500 / 5000) × 100

= 0.1 × 100 = 10%