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Chapter 15: Q3. (page 319)

The actual reason that banks must hold required reserves is:

  1. To enhance liquidity and deter bank runs

  2. To help fund the Federal Deposit Insurance Corporation, which insures bank deposits

  3. To give the Fed control over the lending ability of commercial banks.

  4. To help increase the number of bank loans

Short Answer

Expert verified

The correct option is c.

Step by step solution

01

Explanation

The Fed decides the required reserve ratio or required reserve amount to affect the lending capacity of the banks. A higher ratio means low availability of money with the banks that can be offered as loans, thus resulting in lower lending capacity. A low required reserve ratio means greater capacity to extend loans.

A commercial bank must keep some percentage of its checkable deposit with the Fed. For example, if the required reserve rate is 5%, it becomes compulsory for a commercial bank to keep 5% of checkable deposit liabilities with the Fed.

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Most popular questions from this chapter

What is the difference between an asset and a liability on a bank’s balance sheet? How does net worth relate to each? Why must a balance sheet always balance? What are the major assets and claims on a commercial bank’s balance sheet?

Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have \(2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system?

  1. \)0

  2. \(200 million

  3. \)2 billion

  4. $20 billion

Why is the banking system in the United States referred to as a fractional banking reserve system? What is the role of deposit insurance in a fractional reserve system?

A single commercial bank in a multibank banking system can lend only an amount equal to its initial pre-loan ______________.

  1. total reserves

  2. excess reserves

  3. total deposits

  4. excess deposits

The two conflicting goals facing commercial banks are:

  1. profit and liquidity.

  2. profit and loss.

  3. deposits and withdrawals.

  4. assets and liabilities.
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