A bank has $50,000 in deposits from its checking account customers and loans of $49,000. Of the $49,000 loaned out, $43,000 had remained in the checking accounts of the loan recipients but it now has been converted to cash by the loan recipients. The bank had $50,000 cash on hand prior to the remaining loan proceeds being converted to cash, and the reserve requirement is 25%. The reserve ratio for this bank after the remaining loan proceeds are converted to cash is _____, and _____ meeting its reserve requirement.
A) 14%; it is not
B) 53.76%; it is
C) 0.002%; it is not
D) 20%, it is

Question

Quizplus · Accepted Answer

The reserve ratio is calculated as cash reserves divided by total deposits. After the loan proceeds are converted to cash, the bank has $7,000 in cash ($50,000 initial cash - $43,000 converted to cash). The reserve ratio is $7,000 / $50,000 = 14%. The bank is not meeting the 25% reserve requirement.

A Bank Has $50,000 in Deposits from Its Checking Account