Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Excessive lending beyond deposit growth
B
Increased customer withdrawals
C
A sudden rise in interest rates
D
Strict government regulations on reserve levels
Understanding the Answer
Let's break down why this is correct
Answer
If a bank cannot meet its required reserve ratio, it means it does not have enough money set aside compared to the deposits it holds. This situation often arises when too many customers withdraw their money at once, which can happen during a financial crisis or loss of confidence in the bank. For example, if a bank has $1 million in deposits but only $50,000 in reserves, it is not meeting the required ratio. This shortfall can lead to serious problems for the bank, such as penalties from regulators or even bankruptcy. Therefore, managing reserves carefully and ensuring liquidity is crucial for a bank's stability.
Detailed Explanation
When a bank lends too much money compared to what it has in deposits, it can run low on reserves. Other options are incorrect because Some might think that if customers take out money, it causes low reserves; A rise in interest rates might seem like a reason for low reserves.
Key Concepts
Bank Reserve Management
Liquidity Management
Monetary Policy
Topic
Bank Reserve Management
Difficulty
medium level question
Cognitive Level
understand
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