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    Bank's Required Reserves

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    In what form does a bank hold its required reserves? Assume the Fed has a 20 percent required reserve ratio. What amount of checkable deposits can be supported by $10 million in required reserves?

    My answer to a first part In what form does a bank hold its required reserves?

    Banks are limited in the process of money creation by the need to hold some assets in the form of reserves. Today the amount of reserves and the form that they take are determined by government regulation. The amount of reserves that banks must hold is calculated as a percentage of the deposits they hold. This percentage is called the required reserve ratio. In equation form, required reserves are computed as:
    (1) Required Reserves = (Required Reserve Ratio)x(Deposits).
    Banks can hold more reserves than are required. Any reserves above what are required are excess reserves, or:
    (2) Excess Reserves = Legal Reserves - Required Reserves.
    Banks prefer not to hold excess reserves because in doing so they sacrifice the opportunity to hold other assets that earn interest and because today there are no benefits in holding excess reserves.

    I am however, not sure how ot answer this part of the question
    Assume the Fed has a 20 percent required reserve ratio. What amount of checkable deposits can be supported by $10 million in required reserves?

    Please help me

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    Solution Preview

    In what form does a bank hold its required reserves? Assume the Fed has a 20 percent required reserve ratio. What amount of checkable deposits can be supported by $10 million in required reserves?

    In what form does a bank hold its required reserves?

    Required reserves may be held in the form of cash in the bank's vault (i.e., vault cash) or as a deposit at the Federal Reserve Bank in its ...

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    This solution is comprised of a detailed explanation to answer in what form does a bank hold its required reserves and what amount of checkable deposits can be supported by $10 million in required reserves.

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