Answered: How much Excess Reserves does Second…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Second National Bank has Reserves (Cash) of $25,000 and Demand Deposits of $100,000. The Required Reserve Ratio is 25%. Households deposit $4,000 in currency into their Checkable Deposit accounts at Second National Bank (remember that the bank's balance sheet must remain in balance). How much Excess Reserves does Second National Bank now have?

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Wasn't the $25,000 on the initial Reserve considered Required Reserve? If so, the Excess Reseve would originally be $75,000 (100,000*0.75). When the household deposited $4,000 into the bank, the Deposits increased from $100,000 to $104,000. Since the Required Reserve Ratio was 25%, that means, Required Reserve increases $1,000 (4,000*25%), and has $26,000 ($104,000*25%) or ($25,000 + 1,000). As a result, the Excess Reserve now increased 3,000 (4,000 -1,000), and becomes $78,000 ($75,000 + 3000).

Wasn't the answer supposed to be $78,000?

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