Asked by marlena oxendine on May 21, 2024
Verified
Statement I: If a bank has negative excess reserves,its required reserves are greater than its actual reserves.
Statement II: Ideally banks prefer to keep zero excess reserves.
A) Statement I is true and statement II is false.
B) Statement II is true and statement I is false.
C) Both statements are true.
D) Both statements are false.
Negative Excess Reserves
A situation where a bank has less reserves than the minimum required reserve, indicating a potential liquidity problem.
Required Reserves
The minimum amount of funds that a bank must hold in reserve against deposits, as mandated by central banking authorities, to ensure bank liquidity.
Actual Reserves
The physical amount of a commodity or cash held as reserves in a financial institution or by an organization.
- Evaluate the connection between actions of monetary policy, such as open market operations and reserve requirements, and the functioning of banking operations.
Verified Answer
CH
Colin HowellMay 23, 2024
Final Answer :
C
Explanation :
Statement I is true because negative excess reserves indicate that a bank's actual reserves are less than the required reserves, meaning the bank does not have enough reserves to meet the regulatory requirement. Statement II is generally true as banks aim to minimize excess reserves to maximize their profitability, though in practice, the desired level of excess reserves can vary based on economic conditions and regulatory requirements.
Learning Objectives
- Evaluate the connection between actions of monetary policy, such as open market operations and reserve requirements, and the functioning of banking operations.