Documented Problem Solving: Calculating Bank Reserves

Students will:

• calculate required reserves and excess reserves;
• recognize how total reserves, required reserves, and excess reserves are related to each other;
• interpret the impact to required reserves and excess reserves because of a change in total reserves.

This exercise is appropriate for any institution type or class size. It can be used in class by students working individually or in groups of two to three students. It can also be used as part of a homework assignment. It can be used in a Principles of Macroeconomics class or in a Money and Banking course. Students will need a basic understanding about the fractional reserves banking system and the terms total reserves, required reserves, and excess reserves.

For this assignment, a MC, T/F or short answer question is needed. The question should require students to use an analytical process to arrive at the answer. For example,

Suppose a bank has total deposits of $500 million. If the required reserve ratio is 12 percent and the bank's total reserves are equal to $100 million, the level of excess reserves is equal to:
a) $40 million.
b) $60 million.
c) $100 million.
d) $400 million.

Answer: a

Students must be able to define the terms total reserves, required reserves and excess reserves. They also need to understand how to calculate each term and understand how the terms are related to each other. It's important for students to recognize that total reserves are composed of required reserves plus excess reserves. The other calculation they sometimes are confused by is how to determine required reserves. Using a simple T-account is a visual method to demonstrate the relationships.

Students should be told to write a documented problem solution for the question, focusing on the process used to solve the question. A sample documented problem solution:

1. First I reviewed the definitions and formulas for total reserves, required reserves and excess reserves.
2. Then I looked at the T-account that was presented in class.
3. I know that in order to calculate required reserves, total bank deposits must be multiplied by the required reserve ratio.
4. In this case, bank deposits are $500 million multiplied by the required reserve ratio of 0.12 which equals $60 million in required reserves.
5. I also know that required reserves plus excess reserves must equal total reserves.
6. Total reserves are given as $100 million, and required reserves are calculated as $60 million. In order for required reserves plus excess reserves to equal total reserves, excess reserves must be equal to $40 million.

Angelo, T.A. and Cross, K.P. (1993). Classroom Assessment Techniques: A Handbook for College Teachers. San Francisco: Jossey-Bass.