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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

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 following balance sheet is for Big Bucks Bank. The reserve ratio is 20 percent.

Assets
Liabilities and Net worth

\((1)(2)
\)(1')(2')
Reserves

Securities

Loans		22,000

38,000

40,000

Checkable deposits
1,00,000


a. What is the maximum amount of new loans that Big Bucks Bank can make? Show in columns 1 and 1′ how the bank’s balance sheet will appear after the bank has loaned this additional amount.

b. By how much has the money supply changed?

c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in columns 2 and 2′.

d. Answer questions a, b, and c again, on the assumption that the reserve ratio is 15 percent.

Explain why a single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, and how does it relate to the reserve ratio?

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?

A commercial bank has \(100 million in checkable-deposit liabilities and \)12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank’s excess reserves?

  1. \(100 million

  2. \)88 million

  3. \(12 million

  4. \)2 million
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