Suppose that the legal reserve ratio set by the Fed is 10% and that the Fair Bank in Fairdealing, Missouri initially has checkable deposit equal to $270 and a reserve account of $70. A customer of Fair Bank deposits $100 into her checking account. Fair Bank loans 80% of the deposit and places the rest in its reserves at the St. Louis Fed. For simplicity, assume the borrower received the loan as cash. How much does Fair Bank have in excess reserves after the deposit and loan

The answer is $53

Explanation:

Solution

Given that:

The ratio set by the Fed = 10%

The initial check able deposit of Missouri = $270

Reserve account = $70

Deposit is made by a customer of Fair Bank of + $100

Loans form Fair Bank = 80%

Now,

We find the excess bank reserves is stated as follow:

The balance in check able account = check able bank account balance is the deposit done or made

= $270 + $100

= $370

It stated from the question that the legal reserve ratio is 10%

Then

We calculate the amount needed reserves as follows:

Required reserves = 10 * The balance in check able account

= 10% * 370

= 37

Now, we calculate for the actual reserves for the bank which is given below:

The actual reserve = Existing reserves + New additional reserves

= $70 + 20 % * 100

= $90

Thus,

We find the excess reserves which is stated below;

Excess reserves is now = the actual reserves - required reserves

=$90 - $37

= $53