/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q3. The actual reason that banks mus... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What is the difference between an asset and a liability on a bank鈥檚 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鈥檚 balance sheet?

How would a decrease in the reserve requirement affect the (a) size of the monetary multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?

Suppose the following simplified consolidated balance sheet is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent.

a. What is the amount of excess reserves in this commercial banking system? What is the maximum amount the banking system might lend? Show in columns 1 and 1鈥� how the consolidated balance sheet would look after this amount has been loaned. What is the value of the monetary multiplier?

b. Answer the questions in part a assuming the reserve ratio is 20 percent. What is the resulting difference in the amount that the commercial banking system can loan?

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鈥� how the bank鈥檚 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鈥檚 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鈥�.

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

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by the bank? What is the significance of excess reserve?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.