Question

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $200,000. The reserve ratio is 10 percent. The bank sells $15,000 in securities to the Federal Reserve Bank in its district, receiving a $15,000 increase in reserves in return.What level of excess reserves does the bank now have?

Answer 1

Answer:

The excess reserve which bank has amounts to $15,000

Explanation:

The sale of securities will directly transferred to the reserves of the bank that is amount of $15,000. This will increase the reserve through $15,000 to $25,000, since the sale of securities there is no change in the checkable deposits immediately.

The fact that the checkable deposits have not changed states that the required reserves have not changed, therefore, the required reserves still equal to $10,000.

Therefore, the excess reserve is computed as:

Excess reserve = Actual reserves - Required reserves

Excess reserve = $25,000 - $10,000

Excess reserve = $15,000