The Third National Bank has reserves of 20,000 and...

The Third National Bank has reserves of $\$ 20,000$ and checkable deposits of $\$ 100,000 .$ The reserve ratio is 20 percent. Households deposit $\$ 5000$ in currency into the bank that is added to reserves. What level of excess reserves does the bank now have? $L O 4$

Key Concepts

Excess Reserves

Excess reserves refer to the funds that banks hold over and above the mandatory required reserves. These extra reserves can be used for additional lending or investment, influencing the money supply and overall economic activity.

Fractional Reserve Banking

Fractional reserve banking is the system in which banks hold only a fraction of their deposits as reserves while lending out the remainder. This system allows banks to expand the money supply through the process of making loans, driving economic growth and credit availability.

Reserve Ratio

The reserve ratio is the percentage of a bank's checkable deposits that must be held in reserve and not lent out. It is a key regulatory tool used to ensure that banks maintain sufficient liquidity to meet withdrawal demands.

Required Reserves

Required reserves are the mandated amount of funds that banks must hold as reserves, calculated by multiplying the reserve ratio by the total amount of checkable deposits. This requirement ensures that banks have enough liquidity to honor withdrawal requests.

Transcript

00:01 Hey everyone, today we're solving this problem where we want to figure out the level of excess reserves determined in the bank.

00:08 So we are dealing with checkable deposits, the bank's reserves, the reserve ratio, and then an addition of household deposits.

00:24 So if we want to determine excess reserves, while we know the basic formula to determine actual reserves is equal to the required reserves plus the excess reserves.

00:39 With this formula, we know we need to have excess reserves equal to actual reserves minus required reserve.

00:53 All right, so that is the formula we're going to be working off of for this problem.

01:05 And now with this information given, we want to determine what steps we take to figure out this excess reserve.

01:14 So the first step we take is that we see from the problem that there's now an additional 5 ,000 of household deposits.

01:21 So household deposits of 5 ,000 add that to the already existing 100 ,000 means that we get a total of $105 ,000 in checkable deposits.

01:44 So from being an initial value of 100 ,000, it's now at 105 ,000.

01:49 Now our second step is going to we determine the new required reserves.

01:56 With this $105 ,000, we're told that the reserve ratio is 20%.

02:02 So you're gonna do 20 % of 105 ,000, which is 0 .2 times 105 ,000, and you should get a value of $21 ,000.

02:16 So what we have right here is that excess reserves equals some number, minus $21 ,000...

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