If a bank has a deposit of $500,000 and holds reserves of $100,000 and the central bank requires a reserve of 5%, what is (a) the excess reserve...

a) If Central Bank requires a reserve ratio of 5%, we first need to calculate the required the first required reserves. This is calculated as follows: 

Required Reserves = Deposit x Reserve Ratio 

First lets convert the reserve ratio from percentage to decimal form as follows: 

`5% = (5/100) = 0.05`

Required Reserves = `$500 000 xx 0.05 = $25 000`

Now we know the value of the required reserves, we can now determine the excess reserves: 

Excess Reserves = Total reserves - Required reserves 

Excess Reserves = `$100 000 - $25 000 = $75 000`

b) In order to determine the money supply increase, we first need to determine the multiplier. 

Multiplier = 1/(reserved ratio)

Multiplier = `1/0.05 = 20`

Money supply increase = Excess reserves x Reserved ratio 

Money supply increase = `$75000 xx 20 = $1 500 000`

SUMMARY: 

a) Excess Resevers = $75 000

b) Money Supply Increased by $1 500 00