Question

If a bank decides that it wants to hold​ $1 million of excess​ reserves, what effect will this have on checkable deposits in the banking​ system? Assume that the required reserve ratio on checkable deposits is​ 10% and the​ public's holdings of currency do not change
A) Checkable deposits decline by $10 million
B) Checkable deposits decline by $100,000
C) Checkable deposits decline by $1 million
D) Checkable deposits do not change

Answer 1

Answer:

C. Checkable deposits decline by $10 million.

Explanation:

The banks must keep a reserve of money at Central Banks, the amount is defined by the reserve ratio, 10% in this case, but the banks could keep an extra reserve of money at Central Banks, in this case it's $ 1 million, so, if the bank decides to keep that reserve it means will be less money available to checkable deposit in the same amount.

When the banks keeps reserve by his own will, the required reserve ratio is not applicable to the amount, is the same situation as if we want to keep our money in the bank, for banks, they keep money in Central Banks.

hoping having been clear.