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T-Accounts and Bank Reserves
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If a bank has total assets of $250,000 and a reserve requirement ratio of 10%, how much must the bank hold in reserves according to the balance sheet equation?

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Choose the Best Answer

A

$25,000

B

$50,000

C

$75,000

D

$100,000

Understanding the Answer

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Answer

To find out how much the bank must hold in reserves, we use the reserve requirement ratio, which is 10% in this case. This means the bank is required to keep 10% of its total assets in reserve. Since the bank has total assets of $250,000, we can calculate the reserves by multiplying $250,000 by 10%, which gives us $25,000. Therefore, the bank must hold $25,000 in reserves according to the balance sheet equation. This ensures the bank has enough funds available to meet withdrawal demands from customers.

Detailed Explanation

To find the reserves, multiply total assets by the reserve requirement ratio. Other options are incorrect because This answer comes from thinking 10% of a smaller number; This answer is too high.

Key Concepts

reserve requirement ratio
balance sheet equation
Topic

T-Accounts and Bank Reserves

Difficulty

medium level question

Cognitive Level

understand

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