Suppose that T account for the first national bank is as fol

Suppose that T account for the first national bank is as follows: Assets Reserves 50 Loans Liabilities Deposits 200 150 a) b) c) If Central government requires banks to hold Reserve Ratio 5%, how much in excess reserves does If the first National bank reduce its reserve to only required amount, by how much would t What is the main goal of reserve requirement set by central bank? Why does it important for deposit holders? first national bank now hold? he economy\'s money supply increase.

Solution

a) Required reserve = 5% of total deposits = 5% of 200 = $ 10

Excess reserves = Actual reserve - Required reserve = 50 - 10 = $ 40

b) Multiplier = 1/Required reserve = 1/0.05 = 100/5 = 20

Increase in money supply = Excess reserve x Multiplier = 40 x 20 = $ 800

c) Reserve requirement is set by central bank to save the banks from becoming insolvent. Central bank keeps this reserve requirement and help the banks when they face financial problem.

It is also important for deposit holders because this portion of their deposit is safe from all the risk. Banks lend money after maintaining reserve requirement which makes it risky while reserve requirement is safe because it is not lent by the commercial banks.