A bank is required to maintain an average daily balance at the Fed of $700 million. On the first day of the maintenance period it maintains a balance of $750 million, the next two days it maintains a balance of $725 million, the next three days it maintains a balance of $625 million, the next three days it maintains a balance of $775 million, the next two days it maintains a balance of $700 million, and the next two days it maintains a balance of $675 million. What does its balance at the Fed has to be on the last day of the maintenance period in order to have a zero cumulative reserve deficit

$650 million

Explanation:

Calculation to determine the What does its balance at the Fed has to be on the last day of the maintenance period in order to have a zero cumulative reserve deficit

First step is to determine the balance maintained for 13 days in term of product

Using this formula

Product=Numbers of days Balance maintained for those days

Day Balance Product

1 *$750 million=$750 million

2* $725 million=$1,450 million

3* $625 million=$1,875 million

3* $775 million=$2,325 million

2*$700 million=$1,400 million

2*$675 million=$1,350 million

13 $9,150 million

($750 million +$1,450 million+$1,875 million+$2,325 million+$1,400 million+$1,350 million)

Now let calculate the required balance on the last day

Maintained required for 14 days in term of product $9,800 million

(14*$700 million)

Less balance maintained for 13 days in term of product ($9,150 million)

Required balance on the last day $650 million

($9,800 million-$9,150 million)

Therefore its balance at the Fed has to be $650 million on the last day of the maintenance period in order to have a zero cumulative reserve deficit.

the third answer is correct.