Question

Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. Households deposit $10,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have

Answer 1

Third National Bank's excess reserves have increased to $8,000 after a deposit of $10,000 was added to the existing $20,000 in reserves, as the required reserves only increased to $22,000 based on a 20% reserve ratio of the new total checkable deposits of $110,000.

Step-by-step explanation:

Third National Bank originally had $20,000 in reserves and $100,000 in checkable deposits, with a reserve ratio of 20%. In order to calculate the bank's excess reserves after households deposit $10,000 in currency, which the bank adds to its reserves, we must first determine the required reserves. At a 20% reserve ratio, the required reserves for the original $100,000 in checkable deposits would be 20% of $100,000, which is $20,000. The bank was meeting its required reserves exactly before the deposit. After the deposit of $10,000, the total checkable deposits become $110,000 and the required reserves are 20% of $110,000 or $22,000. Since the bank added the $10,000 deposit to reserves, their new reserve total is $30,000.

Subtracting the required reserves ($22,000) from the new total reserves ($30,000) yields the amount of excess reserves. Excess reserves are the reserves that the bank holds above the required minimum. Therefore, the bank now has excess reserves of $30,000 - $22,000 = $8,000.