Chapter 5R, Problem 15MCQ

To determine

The correct option that refers to the required reserve ratio.

Answer to Problem 15MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

The Reserve ratio is the portion of the bank’s total deposit that is required to be kept in the bank’s vault so that it cannot be used for further banking activities. The percentage of the total deposit is set by Federal Reserve. Therefore, option b is correct.

Explanation for incorrect options:

a.

This is the amount that is decided by the Federal Reserve rather than the banks. This is the minimum cash requirement that every bank must keep in the bank’s vault. Therefore, option a is incorrect.

c.

Reserve requirements are used by the Federal Reserve to reduce the risk of bank runs. Therefore, option c is incorrect.

d.

the percentage of reserve ratio is decided by the Federal Reserve depending upon the bank deposits which usually vary between 0% to 10%. Therefore, option d is incorrect.

e.

The Reserve ratio is the proportion of total bank deposits instead of bank loans only. Therefore, option e is incorrect.

Economics Concept Introduction

Liquid assets: Assets that can be converted into cash or cash equivalents in a very short span of time are referred to as liquid assets.

Required reserve ratio: Required reserve ratio refers to the portion of the total money deposits that are collected by the banks. This amount cannot be used for further lending or investing purposes. The percentage is decided by the Federal Reserve.