Deposits in all financial institutions equal $2 trillion. The total reserves held by these institutions are $240 billion, $100 billion of which is in excess of reserve requirements.
a What is the percentage reserve requirements ?
b. What would the percentage reserve requirement have to be to maintain the existing amount of reserves ($240 billion) but eliminate excess reserves?
c. what would happen to deposits at all financial institutions if the existing excess reserves were eliminated? Assume that elimination of excess reserves affects deposits only
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a. Percentage excess reserve = (excess reserve required)/(total reserve). We know the required amount is $100B less than $240B, or $140B, and that the total reserve is $1000B, thus percentage excess reserve = (140B)/(1000B) = 14%
b. Same formula but using 240 instead of 140: Percent excess reserve = (240B)/(1000B) = 24%
c. The deposits would be locked in the financial institutions and not be able to be removed until additional deposits were made