Asked by Marianne Szabelski on Jul 12, 2024
Verified
The main reason that the Fed now requires banks to hold a certain fraction of their deposits in reserves is
A) because banks would otherwise attempt to keep all of their deposits on reserve.
B) to ensure the safety of the deposits.
C) because this allows the Fed to manipulate the money supply.
D) historical continuity.
Required Reserves
The minimum amount of funds that a bank must hold in reserve against deposits, as mandated by central banking regulations.
Money Supply
Refers to the total amount of money—cash, coins, and balances held in checking and savings accounts—available within an economy at a specific time.
Deposits
Are funds placed into an account at a financial institution, creating a balance that can earn interest or be withdrawn for use.
- Recognize and elucidate the instruments of monetary policy utilized by the Federal Reserve, such as open market operations, the discount rate, and reserve requirements.
- Comprehend the influence of Federal Reserve policies on both the banking system and the broader economy, especially in terms of the money supply, interest rates, and inflation levels.
Verified Answer
BF
Babatunde FadojuJul 13, 2024
Final Answer :
C
Explanation :
The Federal Reserve requires banks to hold a fraction of their deposits in reserves primarily to control the money supply. By adjusting reserve requirements, the Fed can influence the amount of money banks can lend out, thereby controlling the expansion or contraction of the overall money supply.
Learning Objectives
- Recognize and elucidate the instruments of monetary policy utilized by the Federal Reserve, such as open market operations, the discount rate, and reserve requirements.
- Comprehend the influence of Federal Reserve policies on both the banking system and the broader economy, especially in terms of the money supply, interest rates, and inflation levels.