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Consider a central bank policy to maintain 8
Consider a central bank policy to maintain 8.4% reserves on deposits held by commercial banks. A bank, ALFA, currently has $10 million in deposits and holds $1 million in reserves at the central bank. What is the excess reserve ratio?
Round your final answer to two decimals, do not include any commas to separate thousands, and exclude the % sign. e.g. Write 12.56% as 12.56. Do not write 12.56% as 0.1256.
Expert Solution
Computation of Excess Reserve Ratio:
Excess Reserve Ratio = (Reserve actually held by the bank - Reserve that the bank should hold) / Total Deposit
Here,
Actual Reserves = $ 1 Million
Required Reserve = $ 10 million * 8.4% = $0.84 million
So,
Excess Reserve Ratio = ($1 million - $0.84 millions) / $10 = 0.16 / $10 = 0.016 or 1.6%
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