In the link below, determine the change in required and excess reserves if the bank takes in an extra $100,000 in deposits. What is the answer to question 1. b)

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To answer this question, we must refer to the previous question as well.  We know that banks have to hold a certain percentage of their deposits in reserve.  We also know that they can hold excess reserves as well.  In order to know what the required reserve ratio is in this case, we must refer to the previous question in the link given. 

From that question, we know that the bank had $1 million in total deposits and $40,000 in required reserves.  That meant that the required reserve ratio was 4%.  The bank held no excess reserves.

In the question at hand, the bank takes in $100,000 in additional deposits.  Since the bank must hold 4% of this sum in reserve, we know that the bank’s required reserves will rise by $4,000 because $4,000 is 4% of $100,000.  The bank will now have $44,000 in required reserves. As far as excess reserves, we will assume that the bank is keeping all of the $100,000 for the time being.  If it does so, its excess reserves are increased by $96,000.

Thus, the bank’s required reserves rise by $4,000 and its excess reserves (assuming that it does not loan out any of this $100,000 deposit) rise by $96,000.

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