1 A new bank has vault cash of 1 million and 5 million in de

1. A new bank has vault cash of $1 million and $5 million in deposits held at its Federal Reserve District Bank. a. If the required reserves ratio is 8 percent, what dollar amount of deposits can the bank have? b. If the bank holds $65 million in deposits and currently holds bank reserves such that excess reserves are zero, what required reserves ratio is implied?

Solution

(a)

Vault cash = $1 million

Federal Reserve District Bank deposit = $5 million

Total deposits = $ 6 million

Required reserve ratio = 8%

Hence, bank can have = 6 million x 8%

= $0.48 million

(b)

If the bank has $65 million in deposits and excess reserves with the bank are zero, it means bank has created a reserve equal to 8% of deposits

Reserves = 65 x 8%

= $5.2 million