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Chapter 10: Problem 3

Bank A has checking account deposits of \(\$ 20\) million, the reserve requirement is 10 percent, vault cash equals \(\$ 2\) million, and deposits in the reserve account at the Fed equal \(\$ 1\) million. What do required reserves equal? What do excess reserves equal?

Short Answer

Expert verified
The required reserves equal \$2 million, and the excess reserves equal \$1 million.

Step by step solution

01

Calculating Required Reserves

First, calculate the required reserves by multiplying the total deposits (\$20 million) by the reserve requirement (10%). So, \( Required\, Reserves = 20\, million * 0.10 = \$2\, million \).
02

Summation of Available Cash

Next, sum up the available cash, which is the vault cash (\$2 million) plus the balance in the reserve account at the Fed (\$1 million). So, \( Available\, Cash = 2\, million + 1\, million = \$3\, million \).
03

Calculating Excess Reserves

Lastly, subtract the required reserves from the total available cash to determine the excess reserves. So, \( Excess\, Reserves = Available\, Cash - Required\, Reserves = 3\, million - 2\, million = \$1\, million \)

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Most popular questions from this chapter

When the Fed conducts an open market purchase, it buys government securities. As a result, the money supply rises. Could the Fed raise the money supply by buying something other than government securities? For example, suppose the Fed were to buy apples instead of government securities. Would apple purchases (by the Fed) raise the money supply? Explain your answer.

What does it mean when we say the Fed is the lender of last resort?

The numerical examples in this section always had banks creating loans (new checking account deposits ) equal to the amount of excess reserves they held. For example, if bank A had \(\$ 900\) in excess reserves, it would create new loans equal to \(\$ 900\) not something less. In reality, banks may not lend out every dollar of their excess reserves, but they usually come close. Why would a bank want to lend out nearly all (if not all) of its excess reserves?

Economists speak about printing, issuing, and supplying paper money. Are these different functions? Where is each function performed?

Define: a. discount rate b. federal funds rate c. open market operation
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