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If the reserves in US banks totaled $10,000 and the total deposits were $20,000 the...

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Mizdee | Student, Undergraduate | Valedictorian

Posted October 15, 2012 at 3:19 AM via web

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If the reserves in US banks totaled $10,000 and the total deposits were $20,000 the banking system's reserve ratio would be?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted October 15, 2012 at 3:28 AM (Answer #1)

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The reserve ratio in this case would be 50%.

The reserve ratio for any banking system or any individual bank is the percentage of its deposits that it keeps on hand rather than using them to make loans.  When a bank keeps large reserves, it cannot make very much money the way it can if it loans those funds out.  However, it will be safer because it is not putting as much of the deposits at risk.

In this case, the system has $20,000 in total deposits.  If $10,000 is kept in the banks, the reserve ratio is 50% because half of all deposits have been kept.

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