Multiple Choice
Which of the following best describes the effect of recording an expense on the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
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
Verified step by step guidance1
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%.
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.
Set up the formula to calculate reserves: Reserves = Reserve Ratio × Total Deposits. Using MathML, the formula can be expressed as:
Substitute the given values into the formula: Reserve Ratio = 8% (or 0.08 as a decimal), and Total Deposits = \$1,000. The calculation becomes:
Perform the multiplication to determine the reserves: Multiply 0.08 by 1,000 to find the amount of reserves the bank must hold.
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