Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of currency
Into checking accounts will create excess reserves of
A) $20 billion.
B) $32 billion.
C) $40 billion.
D) $0.

Question

Quizplus · Accepted Answer

The legal reserve ratio is 0.20, meaning that banks are required to hold 20% of deposits as reserves. Before the currency deposit, there were no excess reserves, so the banks were already holding the required reserves of 20% of their deposits. When the $40 billion deposit of currency is made, the banks must hold 20% of that amount as reserves, which is $8 billion. The remaining $32 billion ($40 billion - $8 billion) is available as excess reserves. Therefore, the answer is B.

Consider the Following Information About a Banking System: New Currency