Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Excess reserves are funds held above the required minimum, while cash reserves are the minimum amount required by law.
B
Excess reserves are used for immediate withdrawals while cash reserves are invested.
C
Excess reserves cannot be used in lending while cash reserves can.
D
There is no difference; both terms mean the same thing.
Understanding the Answer
Let's break down why this is correct
Answer
The primary difference between excess reserves and cash reserves lies in their purpose and amount. Cash reserves are the minimum amount of money that banks must keep on hand to meet customer withdrawals and regulatory requirements. Excess reserves, on the other hand, are any funds that banks hold beyond this minimum requirement. For example, if a bank has $1 million in cash reserves that it must keep and another $200,000 that it does not need to hold, that $200,000 is considered excess reserves. Banks can use these excess reserves to make loans or invest, which helps them earn more money.
Detailed Explanation
Excess reserves are the extra money banks keep beyond what they must have. Other options are incorrect because This answer confuses the purpose of each type of reserve; This option suggests that excess reserves can't be lent out, which is incorrect.
Key Concepts
excess reserves
cash reserves
Topic
Bank Reserve Management
Difficulty
medium level question
Cognitive Level
understand
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