Principles of Finance: Reserve Requirements and Loanable Funds

PRINCIPLES OF FINANCE
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Question 1
a) Upto $40 million 2% reserve is required and after $ 40 million, the reserve increases to
8%.
Dell National Bank has total account balance of $ 200 million
Hence required reserves = (2/100)*40 + (8/100)*(200-40) = $ 0.8 million + $ 12.8 million =
$ 13.6 million
b) Total transaction account balance = $ 200 million
Total balance in form of reserves = $ 13.6 million
Hence, required percentage = (13.6/200)*100 = 6.8%
Question 2
a) It is known that the reserve ratio is 8%.
Total deposits held by the bank = $ 1 million + $ 5 million = $ 6 million
Thus, deposits that the bank can have = 6/0.08 = $ 75 million
b) Implied reserve ratio = (Deposits with bank/Total deposits)*100 = (6/65)*100 = 9.23%
In case of scarcity of loanable funds, Reserve Bank can provide loans for the time needs
which would need to be paid back at a later late. This loan by Reserve Bank is usually
extended when the borrowing depository issues some promissory notes which it would buy
back at a mutually agreed later date.
Video (100 Words)
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