Chapter 10: Problem 1

Define: a. total reserves b. required reserves c. reserve requirement d. excess reserves

Short Answer

Expert verified

Total reserves is the total amount of funds a bank has with itself and includes both required reserve and excess reserves. Required reserve is the minimum reserves a bank is required to hold by law to safeguard its obligations. Reserve requirement is the regulation that mandates the minimum amount of reserve a bank must hold, set by the central bank. Excess reserves are reserves above the required level which banks can choose to lend or hold onto to mitigate risk.

Step by step solution

Define total reserves

Total reserves refers to the total amount of money or assets a bank has in its reserves. This is the total amount of funds that a bank has on hand and it includes both required and excess reserves. This is particularly held in the bank's vault or deposited with the central bank.

Define required reserves

Required reserves are the minimum amount of reserves that a bank is required to hold by law. This is usually a specified percentage of the bank's total deposits. The central bank specifies this amount as a safeguard to ensure that the bank can meet its obligations if needed.

Define reserve requirement

The reserve requirement is set by the monetary policy of the country's central bank. It's the regulation that sets the minimum amount of reserve that must be kept by a financial institution. This requirement accounts for a certain percentage of the bank's total liabilities mostly deposits.

Define excess reserves

Excess reserves refer to any reserves that a bank holds above and beyond the required reserves. Banks can choose to lend out their excess reserves to make more profit or they can choose to keep it in reserve to meet unexpected withdrawals or reduce risk.

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