Use the following to answer questions .
Exhibit: Balance Sheet of the Alpha-Beta Bank

-(Exhibit: Balance Sheet of the Alpha-Beta Bank) If the required reserve ratio is 10% and the market interest rate is 6%, then the opportunity cost of holding excess reserves is
A) zero since Alpha-Beta does not hold any excess reserves.
B) $0.9 million.
C) $2.4 million.
D) $4 million.

Question

Use the following to answer questions .
Exhibit: Balance Sheet of the Alpha-Beta Bank
 
-(Exhibit: Balance Sheet of the Alpha-Beta Bank) If the required reserve ratio is 10% and the market interest rate is 6%, then the opportunity cost of holding excess reserves is
A) zero since Alpha-Beta does not hold any excess reserves. 
B) $0.9 million. 
C) $2.4 million. 
D) $4 million.

Quizplus · Accepted Answer

The opportunity cost of holding excess reserves is the difference between the interest rate that could be earned on those reserves and the required reserve ratio. In this case, the required reserve ratio is 10% and the market interest rate is 6%. Therefore, the opportunity cost of holding excess reserves is 6% - 10% = -4%. This means that for every $1 of excess reserves that Alpha-Beta holds, it is losing out on $0.04 in interest income. The total amount of excess reserves that Alpha-Beta is holding is $24 million. Therefore, the opportunity cost of holding excess reserves is $24 million * -4% = $0.96 million.

Use the Following to Answer Questions