Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
To manage liquidity and ensure bank stability
B
To maximize profits for shareholders
C
To encourage lending to consumers
D
To eliminate competition among banks
Understanding the Answer
Let's break down why this is correct
Answer
The primary purpose of reserve requirements for commercial banks is to ensure that banks have enough cash on hand to meet the demands of their customers. This means that a certain percentage of the money that customers deposit must be kept in the bank and not loaned out. By doing this, the bank can provide cash to customers who want to withdraw their money, which helps maintain trust in the banking system. For example, if a bank has a reserve requirement of 10%, and a customer deposits $1,000, the bank must keep $100 in reserve while it can loan out the remaining $900. This system helps prevent bank failures and promotes financial stability in the economy.
Detailed Explanation
Reserve requirements help banks keep enough money on hand. Other options are incorrect because Some might think reserve requirements are about making money for owners; It's a common belief that these rules encourage banks to lend more.
Key Concepts
Commercial banks
Topic
Commercial Banks and Reserve Requirements
Difficulty
easy level question
Cognitive Level
understand
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