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A bank currently has $150,000 in checkable deposits and $15,000 in reserves
A bank currently has $150,000 in checkable deposits and $15,000 in reserves. The required reserve ratio is 10%. Suppose there is a deposit outflow for $5,000 due to unexpected deposit withdraws.
(i) Does the bank still have enough reserves to meet 10% reserve requirement?
(ii) Assume a fed funds rate of 0.25%. What would be the cost of compliance of required reserve in dollar amount for this bank?
Expert Solution
(a) If there is a deposit outflow for $5,000, the bank will have a reserve shortfall of $4,500.
(b) Cost to comply with this regulation if the bank decides to borrow from another bank to eliminate its reserve shortage is:
= (0.25% of $4,500)
= $11.25
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