# A bank has no excess reserves and a required reserve ratio of 20 percent. If \$10,000 in cash is withdrawn from the bank, it has a reserve deficiency of:  Choose one answer a.\$10,000 b.\$8,000 c.\$1,000 d.\$80,000

A required reserve ratio for a bank is the percentage of outstanding loans, made by the bank to borrowers, that must be held in the reserves of the bank in the form of cash or readily liquid assets. The required reserve ratio is often used as a tool in monetary policy for the purpose of influencing interest and borrowing rates, as it controls the amount of available funds that financial institutions can make loans with.

In the question asked, the required reserve ratio is 20%. This means the bank must have at minimum 20% of the amount of outstanding loans in liquid reserve at the bank. The question states that the bank does not have any excess reserves, so excess reserves = \$0. Then \$10,000 is lent out. This means that the bank now has a reserve deficiency of \$10,000.

The correct answer is A: \$10,000

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The required reserve ratio of the bank is 20%. This implies that the bank has to maintain in the form of cash, or highly liquid government securities an amount with it equal to 20% of the amount that has been lent by the bank to its borrowers. This is done to ensure that the bank has sufficient reserves to be able to honor depositors' requests to withdraw funds.

As the bank in the question does not have any excess reserves and the reserve requirement is 20%, when \$10000 in cash is withdrawn from the bank, it has a reserve deficiency of \$10000. The correct answer is option A.

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