Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Call in loans to increase reserves
B
Invest reserves in long-term securities
C
Increase checkable deposits by offering higher interest rates
D
Reduce the reserve ratio required by the central bank
Understanding the Answer
Let's break down why this is correct
Answer
The bank needs to have enough money in reserves to meet the reserve requirement, which is 10% of its checkable deposits. Since the bank has $500,000 in deposits, it must hold $50,000 in reserves (10% of $500,000). Currently, the bank only has $40,000 in reserves, meaning it is short by $10,000. To comply with the reserve requirement, the bank should either deposit an additional $10,000 into its reserve account or reduce its checkable deposits by the same amount. For example, if the bank takes in fewer deposits or loans out less money, this would help it meet the required reserve amount.
Detailed Explanation
The bank needs to have enough reserves to meet the required 10%. Other options are incorrect because Investing reserves in long-term securities ties up the money; Offering higher interest rates might attract more deposits, but it doesn't help the bank's current reserves.
Key Concepts
Bank Reserve Management
Reserve Requirements
Liquidity Management
Topic
Bank Reserve Management
Difficulty
easy level question
Cognitive Level
understand
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