Question

A bank will want to hold more excess reserves (everything else equal) when ________.

a. it expects to have deposit inflows in the near future
b. brokerage commissions on selling bonds increase
c. the cost of selling loans falls
d. the discount rate decreases

Answer 1

A bank will likely increase its excess reserves when brokerage commissions on selling bonds increase, to avoid high transaction costs and maintain liquidity without incurring additional expenses.

Step-by-step explanation:

A bank will want to hold more excess reserves when brokerage commissions on selling bonds increase. This scenario implies that selling bonds will become more expensive for the bank, making it less attractive as a way to acquire funds quickly. To buffer against potential liquidity needs without incurring high transaction costs, banks would prefer holding more reserves. Other options, such as expecting deposit inflows, are likely to reduce the need for keeping excess reserves. Moreover, if the cost of selling loans falls or if the discount rate decreases, it would typically encourage the bank to hold fewer excess reserves, as it becomes cheaper to access funds through these avenues.