Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Commercial banks must hold a percentage of deposits as reserves, influencing their lending capacity.
B
Higher reserve requirements generally lead to lower interest rates on loans.
C
The reserve requirement is set by the central bank and can affect the money supply.
D
Commercial banks can lend out all deposits without any reserve requirements.
E
Changes in reserve requirements can impact the overall liquidity in the financial system.
Understanding the Answer
Let's break down why this is correct
Answer
Commercial banks play a crucial role in the economy by accepting deposits from customers and providing loans to individuals and businesses. They are required to keep a certain percentage of these deposits as reserves, which is known as the reserve requirement. This means that if a bank has $100 in deposits and the reserve requirement is 10%, it must keep $10 in reserve and can lend out $90. By lending money, banks help stimulate economic growth because it allows businesses to invest and people to buy homes or cars. Overall, reserve requirements help ensure that banks maintain enough funds to meet withdrawal demands while still supporting economic activity through lending.
Detailed Explanation
Other options are incorrect because Some might think banks can lend freely; People may believe that higher reserve requirements mean cheaper loans.
Key Concepts
Commercial Banks
Reserve Requirements
Monetary Policy
Topic
Commercial Banks and Reserve Requirements
Difficulty
medium level question
Cognitive Level
understand
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