Answer to Question #107989 in Macroeconomics for Sarai

Question

A bank currently has $100 million DD, $4 million in reserves, and $8 million in securities. If the r is 10 %, is the bank meeting its legal R? Explain.

Answer 1

The bank must hold a certain fraction of their checkable deposits in reserve form. The fraction of checkable deposits the bank must hold in reserve form is called the required reserve ratio(r). The dollar amount of those deposits is called required reserve, and the rule specifying the amount of reserves that a bank must hold to backup deposits is the reserve requirement. The relationship between these three are given as,

Required reserves = r* checkable deposits.

The difference between bank’s (total) reserves and its required reserves is its excess reserve

Excess reserves = reserves - required reserves.

In a bank’s balance sheet an assets is anything that a bank owns or has claim to. A few examples are the reserves the bank holds, any loans the bank has made to its borrower, and any securities the bank might own.

Required reserves = 10% * 100 million $ = 10 million $.

Excess reserves = 4+8-10 = 2 million $.

https://www.investopedia.com/terms/b/bank-reserve.asp