Question

Suppose first main street bank, second republic bank, and third fidelity bank all have zero excess reserves. the required reserve ratio is 20%. the federal reserve buys a government bond worth $1,500,000 from gilberto, a customer of first main street bank. he deposits the money into his checking account at first main street bank.

Answer 1

The question is incomplete! Complete question along with answer and explanation is provided below.  

Question:  

Suppose first main street bank, second republic bank, and third fidelity bank all have zero excess reserves. the required reserve ratio is 20%. the federal reserve buys a government bond worth $1,500,000 from gilberto, a customer of first main street bank. he deposits the money into his checking account at first main street bank.

Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.

Amount Deposited  | Excess Reserves  | Required Reserves

Given Information:

Deposit amount = $1,500,000

Required Reserve Ratio = 20%

Required Information:

Required Reserves  = ?

Excess Reserves  = ?

Answer:

Required Reserves  = $300,000

Excess Reserves  = $1,200,000

Explanation:

The required reserves are calculated using

Required Reserves  = Deposit Amount x Required Reserve Ratio

Required Reserves  = $1,500,000 x 0.20

Required Reserves  = $300,000

The excess reserves are calculated using

Excess Reserves  = Deposit Amount - Required Reserves

Excess Reserves  = $1,500,000 - $300,000

Excess Reserves  = $1,200,000

The bank can use these excess reserves to make loans.

Amount Deposited   |  Excess Reserves   |  Required Reserves

      $1,500,000        |       $1,200,000      |         $300,000