Question

Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9% to10% of deposits. What would their options be to come up with the cash?

a) Reduce lending, sell assets, or attract more deposits.
b) Increase interest rates, invest in riskier assets, or lobby for policy change.
c) Borrow from other banks, lobby for policy change, or reduce capital requirements.
d) Increase lending, issue bonds, or implement cost-cutting measures.

Answer 1

If banks must increase their required reserves from 9% to 10%, they might reduce lending, sell assets, or attract more deposits to come up with the cash. This change in monetary policy means banks have less to lend, affecting both their operations and the wider economy.

Step-by-step explanation:

If banks were notified that they had to increase their required reserves from 9% to 10% of deposits, several things could happen as a result. This change in reserve requirements, which is part of monetary policy, would mean that banks need to hold more money and thus have less available to lend out. The options banks have to come up with the cash would likely involve:

• Reducing lending: Banks might cut back on the amount of new loans they issue.
• Selling assets: They could sell securities or other assets to raise the needed reserves.
• Attracting more deposits: By offering higher interest rates on deposits or other incentives, banks can encourage more customers to deposit money.

Each of these actions has consequences for the bank's operations and for the wider economy. For example, reducing lending can slow down economic growth, selling assets might have implications for the bank's long-term income, and attracting more deposits could require the bank to pay out more in interest, which could affect their profit margins. These moves are all about balancing the need to maintain the required reserves with the banks' overall operational goals.