Question

"A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are:
A) $100,000.
B) $1 million.
C) $900,000.
D) $50,000."

Answer 1

Answer: The correct answer is A. $100,000

Explanation: The reserve requirement is a regulation by the central bank that sets the minimum amount of reserves that must be held by a commercial bank.

The reserve ratio is the portion of checkable- deposit liablities that commercial banks must hold onto, rather than use for it's primary activities.

Excess reserves occurs in a situation where the actual reserves is greater than the estimated reserves

Computation of Execess reserve: Here, It is set at 10% of the checkable-deposit liabilities which is $9million

10% of $9,000,000 = $900,000

Actual reserves - Estimated Reserves = Excess reserves

$1,000,000 - $900,000 = $100,000