Suppose again that 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 amount of excess reserves does the bank now have? By what amount does your answer differ (yes, it does!) from the answer to problem 3?

The excess reserve is the difference between actual and required reserve.

Here the sale of securities is worth $5000. This sale of securities to the Federal Reserves will directly increase the reserves by $5000. Thus, actual reserves will now be equal to the old reserves of $20000 plus new additional reserves of $5000, that is $25000.

Since there was a sale of the security, this transaction will not affect the checkable deposits. Therefore, checkable deposits will remain the same, that is $100000. The required reserves will be 20 percent of this $100000 of checkable deposits. Hence required reserves will be:

$100000\times \frac{20}{100}=20000$

Hence, the excess reserve =

The answer in problem 3 was $4000, and this answer is $5000. Therefore, the answer differs by $1000.