BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Total bank reserves in the system decreases.
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Total bank reserves are not affected.
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Increase in total bank reserves in the system.
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1 and 3 both
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Detailed explanation-1: -Repaying loans reduces the amount of money in the economy Because the money supply in the hands of the public is made up of bank-created numbers in people’s bank accounts, repaying loans in this way actually reduces the amount of money in the economy.
Detailed explanation-2: -Banks don’t lend out of deposits; nor do they lend out of reserves. They lend by creating deposits. And deposits are also created by government deficits.
Detailed explanation-3: -Reserve Requirement Changes Affect the Money Stock Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.
Detailed explanation-4: -Excess reserves plus required reserves equal total reserves. Because banks earn relatively little interest on their reserves held on deposit with the Federal Reserve, we shall assume that they seek to hold no excess reserves. When a bank’s excess reserves equal zero, it is loaned up.