Question

A bank has a reserve requirement of 0.08. If it has demand deposits of $200,000 and is holding $4,000 in reserves: a. the bank is holding $2,000 in excess reserves. b. the bank could extend additional loans and still meet its reserve requirement. c. all the bank's reserves are excess reserves. d. the bank is not meeting its reserve requirement.

Answer 1

Answer:

Option (d) is correct.

Explanation:

Given that,

Reserve requirement = 0.08

Demand deposits = $200,000

Holding in reserves = $4,000

Reserve required:

= Reserve Requirement ratio × Amount of demand deposits

= 0.08 × $200,000

= $16,000

Therefore, the reserves in holding is less than the required reserves. Hence, the bank is not meeting its reserve requirement.