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# Determining the reserve requirements (in fractional reserve banking)?

Topic: Case state bank
June 16, 2019 / By Eldwen
Question: Below is the T-account for First City Bank, the only bank in a small city-state. In addition to the demand deposits of \$500,000, citizens hold \$200,000 in coins and currency. Assume that demand deposits and currency are the only forms of money. Use this information to answer the following questions. Assets Reserves \$100,000 Loans \$400,000 Liabilities Deposits \$500,000 Assume that the bank has adequate reserves to satisfy a reserve requirement imposed by the government, but it does not hold excess reserves. What is the reserve requirement as a percentage? --------------------- Is the answer 20% ?? I was also wondering, is the reserve ratio the same thing as the reserve requirement? Thanks!

## Best Answers: Determining the reserve requirements (in fractional reserve banking)?

Casimir | 6 days ago
You are right - reserve requirement is really 20% RR = Reserve requirement = Required reserves / Deposits RR = 100'000/500'000 = 0.2 = 20% Reserve ratio is not always the same as reserve requirement. It's only the same in case if banks' reserves equals required reserves. But in case if bank holds excess reserves - then reserve ratio will be higher than required reserve ratio. Reserve ratio = (Required reserves + Excess reserves) / Deposits If Excess reserves=0 then: Reserve ratio=Reserve requirement
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Originally Answered: Determining the reserve requirements (in fractional reserve banking)?
You are right - reserve requirement is really 20% RR = Reserve requirement = Required reserves / Deposits RR = 100'000/500'000 = 0.2 = 20% Reserve ratio is not always the same as reserve requirement. It's only the same in case if banks' reserves equals required reserves. But in case if bank holds excess reserves - then reserve ratio will be higher than required reserve ratio. Reserve ratio = (Required reserves + Excess reserves) / Deposits If Excess reserves=0 then: Reserve ratio=Reserve requirement
Originally Answered: Determining the reserve requirements (in fractional reserve banking)?
I'm trying to look for relevant information. If the bank holds 100k in reserves and the money in the economy is 500k + 200k then the reserve requirement ratio has to be 14.3% that is 1/7th of all the money in this economy.

Allon
I'm trying to look for relevant information. If the bank holds 100k in reserves and the money in the economy is 500k + 200k then the reserve requirement ratio has to be 14.3% that is 1/7th of all the money in this economy.
👍 60 | 👎 -2

Originally Answered: Is there a website that explains banking?
None of us are taught this in school, or anything about personal finances. It doesn't sound like you have a lot of money right now, so the first thing to do is take just a little money, and go to a bank and open a checking account. Find a bank that will not charge you monthly for the privilege of giving them your money to use. When you are working, you deposit your checks in your checking account, and then you withdraw money (or write a check or use your debit card) to buy the things you need. Don't spend more than you have and you won't get in trouble with the bank. Meanwhile, search online and learn all you can about banks and finance, and getting and keeping a good credit report. There are many books in stores and at the library. Educate yourself. No-one here can tell you everything you need to know. Banks have been ripping off the consumer for hundreds of years. The most important thing is to learn to save regularly, become an interest-earner, not an interest payer, and don't live beyond your means. Oh! And learning the difference between good debt and bad debt.
Originally Answered: Is there a website that explains banking?
http://www.banking-guide.org.uk/ Its pretty good, explains different account types, Mortages, Financial Services :P hope you like it

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