Chapter 14: Problem 36

\- Bank deposit creation is limited by \((\mathrm{OO4})\) a) reserve requirements b) the interest rate c) whether a bank is nationally or state chartered d) whether a bank is in a large city or a rural area

Short Answer

Expert verified

The limiting factor for bank deposit creation is a) reserve requirements. Reserve requirements are set by a central bank and directly impact a bank's ability to create loans and deposits. The other options may influence bank operations but do not directly limit bank deposit creation.

Step by step solution

Understand reserve requirements

Reserve requirements are regulations set by a central bank that mandate how much cash a bank must hold in reserve against customer deposits. Reserve requirements directly impact the bank's ability to create loans and deposits. Higher reserve requirements mean a bank must hold more cash in reserve, which reduces its ability to create loans and further deposits. #Step 2: Understanding the interest rate#

Understand the interest rate

The interest rate refers to the cost of borrowing money, usually expressed as a percentage of the principal amount borrowed. Higher interest rates may discourage borrowing, whereas lower interest rates can encourage borrowing and spending. Although interest rates can influence the demand for loans, they don't directly limit a bank's ability to create deposits. #Step 3: Understanding the role of bank chartering#

Understand bank chartering

A bank charter is a legal document that authorizes a financial institution to operate and provide banking services. Whether a bank is nationally or state-chartered may impact its regulations and jurisdiction, but it doesn't directly limit the bank's ability to create deposits. #Step 4: Understanding the impact of a bank's location#

Understand the impact of bank location

A bank's location in a large city or a rural area may affect its customer base, market conditions, and competition. However, a bank's location doesn't directly limit its ability to create deposits. #Step 5: Identifying the main limiting factor#

Identify the correct answer

Based on the analysis provided in the previous steps, it's clear that reserve requirements directly limit a bank's ability to create deposits. The other options may influence a bank's operations but do not directly act as a limiting factor in bank deposit creation. #Step 6: Answering the exercise#

Answer the exercise

Therefore, the correct answer to this exercise is: a) reserve requirements

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