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2. Consider a bank with $10 billion in deposits. Of these deposits, $8 billion are held as fixed-term deposits, and $2 billion are held in
2. Consider a bank with $10 billion in deposits. Of these deposits, $8 billion are held as fixed-term deposits, and $2 billion are held in chequing accounts.
(a) If the interest rate is 5% and the bank has reserve requirements of 10%, what is the cost of the reserve requirements to the bank?
(b) Suppose that 15% of the banks chequing deposits are transferred to sweep accounts which sweep out 35% of their balance to overnight securities at the end of each day. What is the cost of the reserve requirements now?
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