If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of

A. $75,000

B. $50,000

C. $150,000

D. either A or B of the above

D. either A or B of the above

Explanation:

The bank has deposits of 1 million and a reserve ratio of 20% which means that the bank needs to have reserves of (0.2*1 million) = 200,000. In this case the bank has excess reserves because its total reserves are 300,000. In case of a deposit outflow, the money will go out of the reserves so the bank will need to re arrange its balance sheet if the deposits decrease below 20% of the deposits.

When the outflow is 150,000 the reserves decrease to (300,000-150,000) = 150,000 and the deposits decrease to (1 million - 150,000) = 850,000

150,000/850,000=17.64%. The reserves fall below 20% so in this scenario the bank will need to re arrange its balance sheet.

When the outflow is 50,000 the reserves decrease to (300,000-50,000) = 250,000. And the the deposits decrease to (1 million - 50,000) = 950,000.

250,000/950,000 = 26.31%, the reserves are more than 20% thus the bank does not need to re arrange its balance sheet.

When the outflow is 75,000 the reserves decrease to (300,000-75,000) = 225,000. And the the deposits decrease to (1 million - 75,000) = 925,000.

225,000/925,000 = 24.32%, the reserves are more than 20% thus the bank does not need to re arrange its balance sheet.

So when the deposit outflows are 75,000 and 50,000 the bank will not need to re arrange its balance sheet.