ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A financial institution can earn a higher credit rating by increasing its level of excess reserves. However, higher excess reserves also lead to higher opportunity costs since the cash or deposit held is not invested to generate higher returns, especially in the long run.

Detailed explanation-2: -The bank will keep some of it on hand as required reserves, but it will loan the excess reserves out. When that loan is made, it increases the money supply. This is how banks “create” money and increase the money supply.

Detailed explanation-3: -Excess reserves are the additional amount of money a bank keeps on hand over the reserve requirement. Excess reserves are important because they act as a safety net during times of economic uncertainty, ensuring the bank has enough money on hand to pay bills and honor withdrawals.

Detailed explanation-4: -Excess reserves are equal to: d. total reserves minus required reserves. Total reserves are the portion of bank deposits that are set aside and banks do not lend out. The required reserves are the portion of bank deposits that banks are required to keep on reserves.