Question

Which of these statements best describes why the required reserve ratio is no longer relevant in most cases today?

1) Sweep accounts eliminated the need for the required reserve ratio.
2) Changes in the required reserve ratio can affect the size of the money multiplier.
3) About 70
4) The required reserve ratio rarely had a positive effect in most situations.

Answer 1

The required reserve ratio's relevance has declined because it is rarely used to conduct monetary policy and large adjustments are disruptive. Sweep accounts have eliminated the need for the required reserve ratio. So the correct answer is option 1.

Step-by-step explanation:

The required reserve ratio is no longer relevant in most cases today because sweep accounts have eliminated the need for it.A sweep account is a type of bank account that automatically transfers funds between a checking account and an interest-earning account to maximize interest profits.

By using sweep accounts, banks can ensure that they meet reserve requirements without having to hold excess reserves. This means that the required reserve ratio, which determines the amount of reserves banks must hold, becomes less important.

For example, let's say a bank has $100 million in checking account deposits and the required reserve ratio is 10%. In the past, the bank would have had to hold $10 million in reserves. However, with the use of sweep accounts, the bank can automatically transfer any excess funds above the required reserve ratio into an interest-earning account, allowing the bank to potentially earn more money.