ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Excess Reserves = Total Reserves-Required Reserves For example, suppose a bank has $20 million in deposits. If its reserve ratio is 10%, then it’s required to keep at least $2 million on hand. However, if the bank has $3 million in reserves, then $1 million of it is in excess reserves.

Detailed explanation-2: -The maximum amount that the bank can lend is 2000 since reserves are 20 percent of the checkable deposit, which means that $20, 000 of reserves is to be maintained by the bank (20% of 1, 00, 000). Thus, the amount they can loan is 22, 000-20, 000=2000. This will increase the checkable deposits and loans by 2000.

Detailed explanation-3: -The reserve ratio is the amount of reserves-or cash deposits-that a bank must hold on to and not lend out. The greater the reserve requirement, the less money that a bank can potentially lend-but this excess cash also staves off a banking failure and shores up its balance sheet.

Detailed explanation-4: -For example, if the bank has a 20% reserve ratio, then the deposit multiplier is 5, meaning a bank’s total amount of checkable deposits cannot exceed an amount equal to five times its reserves.