5) The Friendly National Bank holds $ 50 million in reserves at its Federal Rese

Question

5) The Friendly National Bank holds $ 50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent.

A)If the bank has $ 600 million in deposits, what amount of vault cash would be needed for the bank to be in compliance with the required reserves ratio?

B)If the bank holds $ 10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit.

C)If the Friendly National Bank experiences a required reserves deficit, what actions can it take to be in compliance with the existing required reserves ratio?

Explanation / Answer

a)
12% of 600 million = 0.12*600 = 72 million

So they need $72 in cash in the vault to be in compliance with the required reserves ratio

b)

(10/600)*100 = 0.01666666666667*100 = 1.666666666667 = 1 and 2/3% reserves ratio

So the answer is 1.6667% or 1 and 2/3%

c)

It needs to add more cash to the vault or lower the total amount of deposits in the bank.
If it goes with option 1, then it needs to have $72 million (so it needs to add 72 - 10 = 62 million)
If it goes with option 2, then it should reduce the total amount deposited to 10/0.12 = 83.333 million (roughly). So it would need to remove 600 - 83.333 = 516.667 million from its deposits (and give that money back to the customers)
Either option is viable and it will depend on the situation which one is best.

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