If a bank's reserve ratio is 8\% and the bank has \$1,000 in deposits, what is the amount of its reserves?

• A. \$100
• B. \$80
• C. \$8
• D. \$800

Answer: (B)

Verified step by step guidance

1. Understand the reserve ratio concept: The reserve ratio is the percentage of total deposits that a bank is required to keep as reserves and not lend out. In this case, the reserve ratio is 8%.
2. Identify the total deposits: The problem states that the bank has \$1,000 in deposits. This is the base amount on which the reserve ratio will be applied.
3. Set up the formula to calculate reserves: Reserves = Reserve Ratio × Total Deposits. Using MathML, the formula can be expressed as: $\mathrm{Reserves}=\mathrm{Reserve\; Ratio}\times \mathrm{Total\; Deposits}$
4. Substitute the given values into the formula: Reserve Ratio = 8% (or 0.08 as a decimal), and Total Deposits = \$1,000. The calculation becomes: $0.08\times 1000$
5. Perform the multiplication to determine the reserves: Multiply 0.08 by 1,000 to find the amount of reserves the bank must hold.