Chapter 4 1. Deposits in all financial institutions equal $2 trillion. The total

Question

Chapter 4

1. Deposits in all financial institutions equal $2 trillion. The total reserves held by these institutions are $240 billion, $`100 billion of which is in excess of reserve requirements.

a. What is the percentage reserve requirement?

b. What would the percentage reserve requirement have to be to maintain the existing amount of reserves ($240 billion) but eliminate excess reserves?

c. 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

(a).

The percentage reserve requirement = 7%

Explanation;

Required reserves = Deposits * Reserve requirement

($240000000000 – $100000000000) = $2000000000000 * Reserve requirement

$140000000000 = $2000000000000 * Reserve requirement

Reserve requirement = $140000000000 / $2000000000000

Reserve requirement = 7%

(b).

The percentage reserve requirement = 12%

Explanation;

The percentage reserve requirement have to be to maintain the existing amount of reserves ($240 billion) but eliminate excess reserves, will be calculated as follow;

Required reserves = Deposits * Reserve requirement

$240000000000 = $2000000000000 * Reserve requirement

$240000000000 = $2000000000000 * Reserve requirement

Reserve requirement = $240000000000 / $2000000000000

Reserve requirement = 12%

(C).

When the existing excess reserves were eliminated then the deposits will be locked in the financial institutions and will not be able to be removed until the additional deposits are made.

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