A bank currently has $150 million in deposits and $15 million in reserves. The required reserve ratio is 10% and the federal funds rate of 0.25%. Suppose there is a deposit outflow (i.e. someone withdraws funds from their account) for $5 million.
 
 -Would this bank still comply with the Fed´s requirement of keeping 10% of its deposits in the form of reserves? explain.
 -What would be the cost for this bank to comply with this regulation if the bank decides to borrow from another bank to eliminate its reserve shortage?
 -What would be the cost for this bank to comply with its required reserves if the bank decides to borrow from the Fed at a discount rate of 0.75%?
 -Explain why required reserves serve as insurance against deposit outflows.

Consider a commercial bank policy to maintain 12% of deposits as reserves. The bank currently has $10 million in deposits and holds $400,000 precautionary excess reserves. What is the required reserve on a new deposit of $50,000?

Answer rating: 100% (QA)

1 Yes the bank will continue to comply with the 10 requirement to keep its deposits as a reserve as ... View the full answer