ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Banks would be expected to minimize holding excess reserves because this practice is:
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illegal.
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not profitable.
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technically difficult.
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subject to a stiff excess reserves tax.
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Explanation:
Detailed explanation-1: -Financial institutions are required to hold a minimum amount of reserves to ensure sufficient liquidity when clients want to withdraw cash under normal circumstances.
Detailed explanation-2: -The fraction of deposits held by banks is known as the required reserves, whereas the money left for lending is known as the excess reserves. So, when the bank wishes to hold more excess reserves then it reduces the money to lend in the economy. As a result, the level of money supply in the economy declines.
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