Question : The reserve requirement refers to the:
Option 1: Proportion of deposits that banks must hold as reserves
Option 2: Proportion of loans that banks must make to the government
Option 3: Proportion of profits that banks must reinvest
Option 4: Proportion of assets that banks must liquidate
Correct Answer:
Proportion of deposits that banks must hold as reserves
Solution : The correct answer is (a) the proportion of deposits that banks must hold as reserves.
Reserve requirements are regulations set by the central bank or regulatory authority that mandate the minimum amount of funds that banks must hold as reserves, typically in the form of cash or deposits with the central bank. These reserves act as a buffer to ensure that banks have enough liquidity to meet customer withdrawal demands and other financial obligations.
The reserve requirement is usually expressed as a percentage of a bank's total deposits. For example, if the reserve requirement is 10% and a bank has $100 million in deposits, it would be required to hold $10 million as reserves.
The purpose of reserve requirements is to promote the stability and soundness of the banking system. By mandating that banks maintain a certain level of reserves, it helps ensure that they have the capacity to meet depositors' demands for withdrawals and avoid liquidity problems.
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