Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
True
B
False
Understanding the Answer
Let's break down why this is correct
Answer
False. Commercial banks must keep a portion of deposits as reserves to meet customers’ withdrawal requests and to satisfy regulatory reserve requirements. If a bank lent out every dollar of its deposits, it would have no money on hand to pay out when customers ask for cash, causing a liquidity crisis. Regulators also set reserve ratios that banks must hold, so they cannot lend everything away. For example, if a bank has $1,000,000 in deposits and a reserve requirement of 10 %, it must keep $100,000 in reserve and can only lend $900,000.
Detailed Explanation
Banks are required by law to keep a portion of deposits as reserves, which they cannot lend. Other options are incorrect because The idea that a bank can lend all deposits is a common mistake.
Key Concepts
Commercial Bank Reserves
Required Reserves
Excess Reserves
Topic
Commercial Bank Reserves
Difficulty
easy level question
Cognitive Level
understand
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