Question

The reserve requirement is 10%, and Olga withdraws $3,000 for travel money from her checking account. Assume that banks do not hold excess reserves and that the public holds only checkable bank deposits, i.e., no currency. As a result of the withdrawal, required reserves _____ by _____. decrease; $300 increase; $300 decrease; $3,000 increase; $3,000

Answer 1

As a result of the withdrawal by Olga, the required reserves increases by $300.

Data and Calculations:

Reserve Requirement = 10%

Withdrawal by Olga = $3,000

Increase in Reserves = $300 ($3,000 x 10%)

Thus, since the public does not hold currency but only checkable bank deposits, the reserves will increase by $300 as a result of the $3,000 withdrawal by Olga.

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Answer 2

As a result of the withdrawal, required reserves decreases by $300.

The reserve requirement is the percentage of deposits that banks are expected to keep as reserves. If money is deposited in an account, the amount to be kept as reserves increases. If money is withdrawn in an account, the  the amount to be kept as reserves decreases.

Required reserves = amount withdrawn x reserve requirement

10% x $3000

0.1 x $3000 = $300

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