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Assume the public in the small country of Harvardia does not hold any cash.

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4. Assume the public in the small country of Harvardia does not hold any cash. Commercial banks, however, hold 5% of their checking deposits as excess reserves, regardless of the interest rate.;a. (5 pts.);Consider the balance sheet of one of several identical banks;ASSETS LIABILITIES & NET WORTH;Reserves $ 400 Checking Deposits $2,000;Loans $1,600 Net Worth $ 0;What is the required reserve ratio?;You answered;The required reserve ratio is 0;The bank is holding $400 of total $2000 as reserve, which equals to 5% and the excess reserve stated above is 5% therefore there is no required reserve.;My answer was;Total Reserve Ratio = Reserves/Checking Deposits;= $400/$2000;= 0.2;=20%;Required Reserve Ratio = Total Reserve Ratio - Excess Reserve Ratio;Required Reserve Ratio = 20 % - 5% (given);= 15%

 

Paper#30420 | Written in 18-Jul-2015

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