Question

What are reserve requirements?

A. Requirements that the central bank put a percentage of deposits into commercial banks.
B. Requirements that commercial banks put a percentage of their deposits into the central bank.
C. Requirements that the central bank put a percentage of deposit into the International Monetary Fund.
D. Requirements that the central bank nownow allow borrowing on 15% of deposits.

Answer 1

Reserve requirements are the minimum amount of reserves a bank must hold as a percentage of its deposits, set by the central bank to influence monetary policy, affecting lending and economic activity.

Step-by-step explanation:

Reserve requirements refer to the percentage of a bank's deposits that must be held in reserve and not lent out. The central bank, like the U.S. Federal Reserve, sets these requirements to influence monetary policy. Banks must hold the mandated reserves either as cash in their vaults or as deposits with the central bank. By raising or lowering reserve requirements, the central bank can either reduce or increase the amount of money available for banks to lend, thus impacting the economy's borrowing and spending levels.