Final answer:
The reserve requirement for Second Republic Bank with demand deposits of $150,000, at a 10% reserve ratio, is $15,000. (option 1) Maintaining the reserve is crucial for banks to provide financial stability.
Step-by-step explanation:
The question involves calculating reserve requirements and understanding how these influence bank lending practices. Second Republic Bank has $150,000 in demand deposits and needs to maintain a reserve, as mandated by the Bank of Canada, which is set at 10%.
To find out the required reserve amount, we simply calculate 10% of the demand deposits: $150,000 * 0.10 = $15,000. This will be the reserve that the bank cannot lend out and must keep, usually with the central bank or as cash in their vault.
Historically, according to Federal Reserve guidelines from early 2015 before the reserve requirements were changed, varying percentages were required based on the deposit thresholds.
However, with the onset of the pandemic-induced recession in March 2020, the 10% and 3% reserve requirements were reduced to 0%, effectively eliminating the reserve requirement for all depository institutions. This was a significant change illustrating the flexibility of monetary policy in response to economic conditions.
In this scenario, with a 10% reserve requirement, Second Republic Bank would be holding the correct amount of reserves if they are keeping $15,000, corresponding to option 1) $15,000 of the potential choices provided in the question. It is important for banks to maintain this requirement to ensure liquidity and consumer confidence in the banking system.