Answered: South Korea: Bank reserves raised To…

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter13: Money And The Banking System

Section: Chapter Questions

Problem 17CQ

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South Korea: Bank reserves raised

To rein in spending, the Bank of Korea raised the required reserve ratio to 7 percent from 5 percent—the first raise in almost 17 years. With higher required reserves, banks will have to cut the amount of loans they make. Source: The New York Times, November 24, 2006 Explain why the higher required reserve ratio means that banks will have to cut the amount of loans they can make.

Part 1 The higher required reserve ratio means that banks will have to cut the amount of loans they can make because ______.

A. they have fewer excess reserves with which to make loans

B. they make more open market purchases and have less money to loan out to customers

C. they are forced to raise interest rates and customers are less likely to borrow money at higher interest rates

D. the discount rate rises

E. they decrease the amount of currency they hold and increase their deposits at the central bank, so they have less money to loan out to customers

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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