Chapter 11, Problem 9Q

To determine

How do sweep accounts and money market mutual funds allow banks to avoid reserve requirements?

Concept Introduction:

Checking account deposits allow the account holder to carry out all financial transactions and write checks to the third parties. Checking account includes non-interest-bearing accounts (demand deposits), interest-bearing negotiable order of withdrawal accounts, and money market deposit accounts. Checkable deposit accounts are payable on demand, so account holders are ready to go with zero or less interest rate on these checkable deposit accounts. These fall in M1 category of money. However, the funds in this checking account need to be reserved with the Federal Reserve as per their set reserve requirement. The Federal Reserve does this to control liquidity in the banking system and to control the bank's money deposits.