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Chapter 14: Problem 10

Which of these is a secondary reserve? (LO2) a) Treasury bills b) gold c) vault cash d) deposits at the Federal Reserve District Bank

Short Answer

Expert verified
The correct answer is a) Treasury bills, as they are considered a secondary reserve due to being low-risk, highly liquid assets that can be converted into cash quickly.

Step by step solution

01

Understand the Concept of a Secondary Reserve

Secondary reserves are the liquid assets that are not as immediately accessible as primary reserves, although they can be converted into cash fairly quickly. These are held by banks to meet a need for additional cash, beyond what they can cover with their primary reserves. Secondary reserves usually earn the bank some interest and hence are preferable to hold rather than primary reserves, from a profitability perspective.
02

Eliminate the Options That Represent Primary Reserves

Primary reserves include vault cash and deposits at the Federal Reserve District bank. These are the absolute most liquid, immediately accessible assets that a bank has. Therefore, options c) and d) can be ruled out as they are examples of primary reserves.
03

Find the Correct Answer Among the Remaining Options

Between Treasury bills and gold, Treasury bills are considered a secondary reserve and gold is not. Treasury Bills are government issued securities that can be sold in the open market quickly and thus meet the definition of secondary reserves. They are low-risk and offer modest returns. Furthermore, Treasury bills also offer the advantage that their sale, unlike that of gold, does not affect the market prices considerably, preserving their value for the selling entity. Therefore, option a) Treasury bills is the correct answer.

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Most popular questions from this chapter

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