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Excess reserves act as an insurance against deposit outflows. Suppose that your bank holds $40 million in excess reserves and $100 million in required reserves.

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Excess reserves act as an insurance against deposit outflows. Suppose that your bank holds $40 million in excess reserves and $100 million in required reserves. Suppose that your bank can earn 5 percent on its loans and that the interest paid on reserves is 0.5 percent. What would be the cost of this insurance policy? Show your work to receive credit. (5 PTS)

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