Documented Problem Solving: Calculating Bank Reserves
- 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.
Context for Use
Description and Teaching Materials
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.
Teaching Notes and Tips
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:
- First I reviewed the definitions and formulas for total reserves, required reserves and excess reserves.
- Then I looked at the T-account that was presented in class.
- I know that in order to calculate required reserves, total bank deposits must be multiplied by the required reserve ratio.
- In this case, bank deposits are $500 million multiplied by the required reserve ratio of 0.12 which equals $60 million in required reserves.
- I also know that required reserves plus excess reserves must equal total reserves.
- 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.
References and Resources
Angelo, T.A. and Cross, K.P. (1993). Classroom Assessment Techniques: A Handbook for College Teachers. San Francisco: Jossey-Bass.