Question

Use the following example to answer the following questions: Imagine that Stella deposits $25,000 in currency (which she had been storing in her closet) into her checking account at the bank. Assume that thisinstitution has a required reserve ratio of 25 percent. As a result of this deposit, by how much will the bank's excess reserves increase?

A) $31,250
B) $100,000
C) $25,000
D) $18,750

Answer 1

Excess reserves = $18750

so correct option is D) $18,750

Step-by-step explanation:

given data

Stella deposits = $25,000

reserve ratio = 25 percent

to find out

how much will the bank's excess reserves increase

solution

we get here first required reserves that is express as

required reserves = deposits × reserve ratio ....................1

put here value we get

required reserves = $25000 × 25%

required reserves = $25000 × 0.25

required reserves = $6250

and

excess reserve will be here as

Excess reserves = deposits - required reserves ......................2

put here value

Excess reserves = $25000 - $6250

Excess reserves = $18750

so correct option is D) $18,750