Question

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $100,000. The reserve ratio is 20 percent. The bank sells $20,000 in securities to the Federal Reserve Bank in its district, receiving a $20,000 increase in reserves in return.

Instructions: Enter your answer as a whole number.

What level of excess reserves does the bank now have? $

Answer 1

Required reserves = Checkable deposits * Reserve ratio = $100,000 * 20% = $20,000

The amount received ($20,000) from sale of securities is transferred to reserves of the bank.

Total reserves = $20,000 + $20,000 = $40,000

There will be no change in the checkable deposits and so the required reserves do not change.

Excess reserves = Total reserve – Required reserve = $40,000 - $20,000

Excess reserves = $20,000