Question

Suppose again that the Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank now sells $5,000 in securities to the Federal Reserve Bank in its district, receiving a $5,000 increase in reserves in return. What level of excess reserves does the bank now have? By what amount does your answer differ (yes, it does!) from the answer to question 3?

Answer 1

Answer:

$5,000

Explanation:

Data provided in the question:

Reserves balance = $20,000

Checkable deposits = $100,000

Reserve ratio = 20 percent

Selling amount for securities = $5,000

Increase in reserves = $5,000

Now,

New reserve balance = Reserves balance + Increase in reserves

= $20,000 + $5,000

= $25,000

Required  reserve = 20% of Checkable deposits

= 20% of $100,000

= $20,000

Therefore,

Excess reserves = Actual reserve - Required reserve

= $25,000 - $20,000

= $5,000