For every question, please write down each main step before you obtain the final
ID: 2618704 • Letter: F
Question
For every question, please write down each main step before you obtain the final answer. Correct final answer with incorrect related work (calculation) or without any work may receive 0 point. On the contrary, incorrect final answer with correct related work (calculation) will receive partial credits.
Question 1 –Reserve Requirements [6 points]: Deposits in all financial institutions equal $2 trillion. The total reserves held by these institutions are $200 billion, $100 billion of which is in excess of reserve requirements.
What is the percentage reserve requirement?
What would the percentage reserve requirement have to be to maintain the existing amount of reserves ($200 billion) but eliminate excess reserves?
What would happen to deposits at all financial institutions if the existing excess reserves were eliminated? Assume that elimination of excess reserves affects deposits only.
Explanation / Answer
What is the percentage reserve requirement?
The percentage reserve requirement = (Required reserve / Total deposits) *100
Where
Required reserve = $200 billion - $100 billion = $100 billion
Total deposits = $2 trillion
Therefore,
The percentage reserve requirement = ($100,000,000,000 /$2,000,000,000,000) *100
=0.05 * 100
= 5%
What would the percentage reserve requirement have to be to maintain the existing amount of reserves ($200 billion) but eliminate excess reserves?
The percentage reserve requirement have to be to maintain the existing amount of reserves = (Total reserve / Total deposits) *100
Where
Total reserve = $200 billion
Total deposits = $2 trillion
Therefore,
The percentage reserve requirement has to be to maintain the existing amount of reserves
= ($200,000,000,000 /$2,000,000,000,000) *100
=0.10 * 100
= 10%
What would happen to deposits at all financial institutions if the existing excess reserves were eliminated? Assume that elimination of excess reserves affects deposits only.
If the existing excess reserves were eliminated and that elimination of excess reserves affects deposits only the deposits would be locked in the financial institutions, then the financial institutions will not be able to remove it until additional deposits were made.
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