Suppose that Third National Bank has reserves of $ 20,000 and checkable deposits of $ 100,000. The reserve ratio is 20 %. The bank 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?

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Asked Nov 21, 2019
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Suppose that Third National Bank has reserves of $ 20,000 and checkable deposits of $ 100,000. The reserve ratio is 20 %. The bank 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? 

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Expert Answer

Step 1

Reserves = $20,000

Deposits = $100,000

Reserve Ratio=20%

Securities sold by bank=$5000

Increase in reserves after selling securities = $5000

 

Since the reserve ratio is 20%, bank needs to maintain only 20% of its reserves. Therefore, its reserves are as:

Hence, its required reserves are $20,000.

Required Reserve= Reserve ratio x deposits
20
-x 100000
100
- 20000
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Required Reserve= Reserve ratio x deposits 20 -x 100000 100 - 20000

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Step 2

Since its reserves increases after selling securities, bank’s t...

Total reserves Required reserves+Increased reserves after securities sell
20000+5000
-25000
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Total reserves Required reserves+Increased reserves after securities sell 20000+5000 -25000

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