Answered: Banks want to hold as little cash as…

Banks want to hold as little cash as possible because holding cash a. provides very little liquidity. b. offers a minimal rate of return. c. is risky. d. provides too much liquidity.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter13: Money And The Financial System

Section: Chapter Questions

Problem 2.8P

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Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

Banks want to hold as little cash as possible because holding cash

	a.	provides very little liquidity.
	b.	offers a minimal rate of return.
	c.	is risky.
	d.	provides too much liquidity.

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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