# Documented Problem Solving: Calculating Bank Reserves

## Summary

## Learning Goals

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.

## 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.

Answer: a

## Teaching Notes and Tips

## Assessment

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.