When a bank borrows 550,000 from the FED snd received s short-term ajustment credit for 3 days with the loan promised to be paid on the 6th day how much total reserves would rise with this loan.
To calculate the total reserves that would rise with this loan, we need to understand the components of total reserves.
Total reserves consist of two main categories: required reserves and excess reserves. Required reserves are the minimum amount that banks must keep on hand to meet regulatory requirements. Excess reserves are any reserves held above the required amount.
In this scenario, when the bank borrows $550,000 from the Federal Reserve (FED), this loan will increase the bank's reserves. However, we need additional information to determine the increase in total reserves. We need to know the reserve requirement ratio set by the FED for the bank in question.
The reserve requirement ratio is the percentage of certain deposit liabilities (typically checking and savings accounts) that banks must hold in reserves. For example, if the reserve requirement ratio is 10%, it means banks must hold 10% of their deposit liabilities in reserves.
Once we know the reserve requirement ratio, we can calculate the increase in total reserves. Let's assume the reserve requirement ratio is 10%, and the bank does not have any excess reserves before the loan.
Step 1: Calculate the required reserves:
Required Reserves = Loan Amount x Reserve Requirement Ratio
Required Reserves = $550,000 x 10%
Required Reserves = $55,000
Step 2: Calculate the increase in total reserves:
Increase in Total Reserves = Required Reserves
Increase in Total Reserves = $55,000
Therefore, in this scenario, the total reserves would rise by $55,000 with this loan.
Note: If the bank had existing excess reserves before taking the loan, the total reserves would increase by the sum of the required reserves and the excess reserves.