2 Suppose that the bank has 100 million of deposits in curr

2) Suppose that the bank has $ 100 million of deposits in current accounts and the ratio of compulsory (compulsory) reserve is 20 percent. If the central bank reduces the mandatory (mandatory) reserve ratio to 15 percent. Calculate excess reserves (amount of funds available for lending) to the bank.

Solution

Reserve requirement before reduction in bank mandatory rate = 20% of the deposits

                                                                                                                     = 100,000,000* .20

                                                                                                                      = 20,000,000

If the reserve requirement reduced to 15%, then total cash that bank need to reserve is = 100,000,000* .15 = 15,000,000

Access amount that will be available with the bank to lend is = 20000000 – 15000000 = 5,000,000