Question

The monetary policy of Namdian is determined by the Namdian Central Bank. The local currency is the dia. Namdian banks collectively hold 100 million dias of required reserves, 25 million dias of excess reserves, 250 million dias of Namdian Treasury Bonds, and their customers hold 1,000 million dias of deposits. Namdians prefer to use only demand deposits and so the money supply consists of demand deposits.Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve requirement and what is the reserve ratio

Answer 1

reserve requirement = 100/1000 x 100 = 10% (=required reserves/deposits x 100)

reserve ratio = (100 + 25)/1000 x 100 = 12.5% (=(excess reserves + required reserves)/deposits x 100)