Question

The required reserve ratio is 0.05. If the Federal Reserve buys​ $1,000,000 worth of bonds from a bond dealer who has her account at Bank XYZ above and she deposits the entire​ $1,000,000 into a checking account at Bank​ XYZ, what will be the new required and excess reserves for this bank​ (assume no new loans are​ made)? (Remember that required reserves are found by applying the required reserve ratio to the amount of total checkable​ deposits.)

Answer 1

Missing information:

total deposits in bank XYZ = $4,000,000

total reserves = $3,800,000

Answer:

the required reserve = $250,000

excess reserves = $4,550,000

Explanation:

required reserve ratio = 5%

the Fed buys $1,000,000 worth of bonds

the $1,000,000 are deposited entirely in bank XYZ

total checkable deposits will increase to $5,000,000

the required reserve = $5,000,000 x 5% = $250,000

excess reserves = total checkable deposits - total loans - required reserves = $5,000,000 - $200,000 - $250,000 = $4,550,000