Question

Third National Bank has reserves of \(20,000 and checkable deposits of \)100,000. The reserve ratio is 20 percent. Households deposit $5,000 in currency into the bank, and the bank adds that currency to its reserves. What amount of excess reserves does the bank now have?

Short answer

The excess reserves of Third National Bank would be $4000.

Step-by-step solution

Calculating excess reserves

Excess Reserves= Actual Reserves-Required Reserves

Therefore, calculate the required reserves and the actual reserves to find the excess reserves. The required reserve is a percentage of the checkable deposits. Therefore, checkable deposits will be equal to the initial checkable deposits plus new checkable deposits.

100000 + 5000 = 105000

The required ratio will be:

$105000\times \frac{20}{100}=21000$

The actual reserves will be the new deposits added to the original reserves. Hence:

20000 + 5000 = 25000

The excess reserves will be = 25000-21000 =$4000.

Therefore, excess reserves will be $4000.