Question

Question 68 (1 point) Suppose a banking system has $ 125,000 of checkable deposits and actual reserves of $ 17,000. If the reserve ratio is 9% Excess Reserves in the banking system are equal to: $ (Put only numbers in your answer; do not put a dollar sign in your answer.) Your Answer: Answer

Answer 1

Part 1) All banks are required to keep a certain proportion of their deposits as reserves. The proportion is called the required reserve ratio. Any amount above the required reserve is called excess reserve. We have the following information.

Checkable deposits = $125,000

Actual Reserves = $17,000

Required reserve ratio = 9%. So, it means the bank need to keep 9% of the checkable deposits as reserves.

9% of $125,000 = $11,250 (Required Reserve)

Excess Reserve = Actual Reserve – Required Reserve

Excess Reserve = $17,000 – $11,250

Excess Reserve = $5,750

Part 2) We have the following information

Checkable deposits = $120,000

Actual reserves = $16,000

Required reserve ratio = 6%. So, it means the bank need to keep 6% of the checkable deposits as reserves.

6% of $120,000 = $7,200 (Required Reserve)

The banking sector can expand the supply of money through the excess reserves.

Money Supply = Excess Reserve × Money Multiplier

Money Multiplier = 1/Required Reserve Ratio = 1/0.06 = 16.67

Excess Reserve = Actual Reserve – Required Reserve

Excess Reserve = $16,000 – $7,200

Excess Reserve = $8,800

Money Supply = Excess Reserve × Money Multiplier

Money Supply = $8,800 × 16.67

Money Supply = $146,696