Question at position 23 Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________.80%10%20%90%Single choice
A
80%
B
10%
C
20%
D
90%

Question

Question at position 23 Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________.80%10%20%90%Single choice

A

80%

B

10%

C

20%

D

90%

BlackTom AI · Accepted Answer

Required reserve ratio = required reserves ÷ checkable deposits. Relevant concepts: total reserves = vault cash + deposits at the Fed; total reserves split into required reserves and excess reserves; required reserve ratio tells what fraction of checkable deposits must be held as required reserves.

Step-by-step reasoning:
1. Compute total reserves held after the new checkable deposit:
   - Vault cash = $2 million
   - Deposits at the Fed = $8 million
   - Total reserves = 2 + 8 = $10 million
2. Total reserves consist of required reserves plus excess reserves. We are given excess reserves = $9 million, so:
   - Required reserves = Total reserves − Excess reserves = 10 − 9 = $1 million
3. Interpret the phrase “from a new checkable deposit.” When a new checkable deposit is made, the bank’s reserves increase by the amount of that deposit (the deposit is the source of the added reserves). Therefore the new checkable deposit must equal the total reserves created, $10 million.
4. Compute the required reserve ratio:
   - Required reserve ratio = Required reserves ÷ Checkable deposits = $1 million ÷ $10 million = 0.10 = 10%

Why the correct answer is 10%:
- The arithmetic shows required reserves are $1M on a $10M deposit, so the bank must hold 10% as required reserves.

Why the other choices are incorrect:
- 80% would imply required reserves of $8M on a $10M deposit (not the computed $1M).
- 20% would imply required reserves of $2M (not $1M).
- 90% would imply required reserves of $9M (this confuses required and excess reserves; $9M is the excess reserves given).

Conclusion: The required reserve ratio is 10%, which matches the provided answer.

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