Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
To control inflation
B
To ensure banks have enough liquidity to meet customer withdrawals
C
To increase bank profits
D
To facilitate international trade
Understanding the Answer
Let's break down why this is correct
Answer
The primary purpose of reserve requirements imposed on commercial banks is to ensure that banks have enough money on hand to meet the demands of their customers. This means that banks must keep a certain percentage of their deposits in reserve, either as cash or in an account with the central bank, rather than lending it all out. By doing this, banks can provide cash to customers who want to withdraw their money and maintain trust in the banking system. For example, if a bank has $1 million in deposits and the reserve requirement is 10%, it must keep $100,000 in reserve, allowing it to safely lend out the remaining $900,000. This system helps prevent bank runs and promotes stability in the financial system.
Detailed Explanation
Reserve requirements help banks keep enough cash on hand. Other options are incorrect because Some might think reserve requirements are mainly for controlling prices in the economy; It's a common belief that reserve requirements are meant to help banks make more money.
Key Concepts
Regulation of banks.
Topic
Commercial Banks and Reserve Requirements
Difficulty
easy level question
Cognitive Level
understand
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