If a bank has access reserves of $8000 and checkable deposits of $150000. If the reserve ratio is 20% what is the size of the banks actual reserve?
The reserve requirement for banks is set by the Central Bank of the country and is the percentage of funds that can be lent by the bank or which are deposited with the bank in the form of checkable deposits, in the form of cash or highly liquid government securities. The reserves help the bank pay those that have deposited money in case they are required to do so by the depositers.
Excess reserve is the amount of funds that the bank has in excess of the reserve ratio.
Here, the bank has excess reserves of $8000 and checkable deposits of $150,000. The amount in the form of reserve ratio that it has to maintain is 0.2*150000 = 30000. Adding the excess reserves, we have 30000+8000 = 38000
The bank's actual reserve assets are $38000.