Given the Balance Sheet Below and Assuming a Required Reserve

question 164

Multiple Choice

Given the balance sheet below and assuming a required reserve ratio of 20 percent,how much (in dollar terms) must the bank hold in required reserves?

• A) It is failing to meet its reserve requirement.
• B) It is just meeting its reserve requirement,but has no excess reserves.
• C) It is meeting its reserve requirement,and has $5 million in excess reserves.
• D) It is meeting its reserve requirement,and has $10 million in excess reserves.
• E) It is meeting its reserve requirement,and has $15 million in excess reserves.

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Definitions:

Asymmetric Information

A situation where one party in a transaction has more or superior information compared to another, often leading to an imbalance in the transaction.

Small Firms

Businesses often characterized by a small number of employees, limited market share, and possibly locally oriented markets.

Principal-Agent Problem

A situation in economics where there is a conflict of interest between a principal (such as a shareholder) and an agent of the principal (such as a manager), due to the agent having more information.

Golden Parachute

A substantial benefits package given to top executives if the company is taken over by another firm, and the executives are terminated as a result of the takeover.