If a bank's desired reserve/deposit ratio is 0.33 and it has deposit liabilities of $100 million and reserves of $50 million, it:

A) has the correct amount of reserves and outstanding loans.

B) has too few reserves and will reduce its lending.

C) should increase the amount of its reserves.

D) has too many reserves and will increase its lending

Question

Noe Montoya

Business

28 July, 16:23

If a bank's desired reserve/deposit ratio is 0.33 and it has deposit liabilities of $100 million and reserves of $50 million, it:

A) has the correct amount of reserves and outstanding loans.

B) has too few reserves and will reduce its lending.

C) should increase the amount of its reserves.

D) has too many reserves and will increase its lending

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Answers (1)

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Alfonso Diaz · Answer 1

D) has too many reserves and will increase its lending

If the bank has a reserve ratio is 0.33 it means that it has to keep 33% of all its deposits as reserves and it can lend 67% of all deposits. So if the bank has deposit liabilities of 100 million it needs to keep 33 million (100 million*0.33) in reserve and it can lend out 67 million (100 million * 0.67). Because the bank has reserves of 50 million it means that it has only lend 50 million and can lend 17 million more (67 million - 50 million). So this means that the bank has more reserves than it needs to keep and will increase its lending.