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Commercial Banks and Reserve Requirements
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Commercial banks are to reserve requirements as: loanable funds are to what?

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Learning Path

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Choose the Best Answer

A

interest rates

B

consumer spending

C

government regulation

D

stock market performance

Understanding the Answer

Let's break down why this is correct

Answer

Commercial banks are required to keep a certain amount of money, known as reserve requirements, to ensure they can meet the needs of their customers. This means they cannot lend out all the money they receive from deposits. Similarly, when we think about loanable funds, we can relate them to the concept of demand for loans. Just like banks need reserves to manage deposits, borrowers need loanable funds to finance their purchases or investments. For example, if someone wants to buy a house, they need to access loanable funds from a bank, which is similar to how banks manage their reserves to ensure they can lend money safely.

Detailed Explanation

Interest rates are like the price of borrowing money. Other options are incorrect because Some might think that consumer spending directly affects loanable funds; It may seem that rules from the government are the same as loanable funds.

Key Concepts

Commercial Banks
Reserve Requirements
Loanable Funds Market
Topic

Commercial Banks and Reserve Requirements

Difficulty

medium level question

Cognitive Level

understand

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