Final answer:
Banks hold reserves to meet the withdrawal demands of depositors, for compliance with Federal Reserve requirements, and to manage risks during economic downturns. Reserves are also critical for monetary policy.
Step-by-step explanation:
Banks hold money in reserve for several reasons. Primarily, reserves are the money that banks keep on hand and do not lend out or invest. The Federal Reserve sets a reserve requirement, which is a certain percentage of depositors' funds that banks must keep in their vaults or at the Federal Reserve Bank. This ensures liquidity, so banks can meet the withdrawal demands of depositors.
During economic downturns such as a recession, banks may hold higher reserves due to increased risks of loan defaults. Reserves are also an important tool in monetary policy, as the central bank can influence economic activity by modifying reserve requirements.
The Safe and Secure Bank, for instance, holds $2 million in reserves, which is money that contributes to the stability of the banking system by providing a cushion against unforeseen withdrawals.