Answered: How much Excess Reserves does Second…

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How much Excess Reserves does Second National Bank now have?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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Question

Second National Bank has Reserves (Cash) of $25,000 and Demand Deposits of $100,000. The Required Reserve Ratio is 25%. Households deposit $4,000 in currency into their Checkable Deposit accounts at Second National Bank (remember that the bank's balance sheet must remain in balance). How much Excess Reserves does Second National Bank now have?

Definition Definition Minimum amount that a commercial bank must hold in liquid assets in order to fulfill central bank regulations.

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Compute the amount of checkable deposits as follows:

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Compute the amount of required reserves as follows:

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Compute the amount of actual reserves as follows:

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Compute the amount of excess reserves as follows:

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Wasn't the $25,000 on the initial Reserve considered Required Reserve? If so, the Excess Reseve would originally be $75,000 (100,000*0.75). When the household deposited $4,000 into the bank, the Deposits increased from $100,000 to $104,000. Since the Required Reserve Ratio was 25%, that means, Required Reserve increases $1,000 (4,000*25%), and has $26,000 ($104,000*25%) or ($25,000 + 1,000). As a result, the Excess Reserve now increased 3,000 (4,000 -1,000), and becomes $78,000 ($75,000 + 3000).

Wasn't the answer supposed to be $78,000?

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