Asked by Katelyn Smith on Jul 13, 2024
Verified
To maximize its profit,a bank will:
A) minimize the number transactions it engages in.
B) maximize required reserves.
C) minimize excess reserves.
D) maximize excess reserves.
E) minimize required reserves.
Excess Reserves
The funds that banks hold over and above the required reserve ratio set by the central bank, which can be loaned out or invested.
Required Reserves
The portion of depositors' balances that banks must have on hand as cash or in reserves at a central bank, used as a measure to ensure liquidity.
- Determine the function of banks in the generation of money via the loan issuance procedure.
- Gain an understanding of the methods by which banks achieve profitability and the relevance of the interest rate gap.
Verified Answer
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Alfredo DominguezJul 13, 2024
Final Answer :
C
Explanation :
Minimizing excess reserves is a strategy banks use to maximize profit. By keeping excess reserves low, banks can lend out more money, earning interest on those loans, which increases their profits. Holding excess reserves incurs an opportunity cost as those funds could be earning interest if lent out.
Learning Objectives
- Determine the function of banks in the generation of money via the loan issuance procedure.
- Gain an understanding of the methods by which banks achieve profitability and the relevance of the interest rate gap.
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