1. Angus bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9% and reserves are currently $27 million. Determine the amount of deposits, the reserve shortage created by a deposit outflow of $5 million, and the cost of the reserve shortage if Angus Bank borrows in the federal funds market, assuming the federal funds rate is 0.25%.
2. Excess reserves acta s insurance against deposit outflows. Suppose that on a yearly basis Malcom Bank holds $12 million in excess reserves and $88 million in required reserves. Suppose that Malcom Bank can earn 3.5% on its loans and that the interest paid on total reserves is 0.2%. What would be the cost of the insurance policy?