Chapter 25, Problem 2MCQ

To determine

The correct option that defines the fraction of bank deposits that is actually held as reserves.

Answer to Problem 2MCQ

Option a is correct.

Explanation of Solution

Explanation for correct option:

a.

Bank’s actual reserve held refers to the reserve amount as per the total bank deposits. For instance, 10% is held as reserve which means $100 is kept as reserve out of $1000. But required reserve can be less or more. Therefore, option a is correct.

Explanation for incorrect options:

b.

Required reserve ratio refers to the ratio that bank should maintain as per Federal banking regulations. Therefore, option b is incorrect.

c.

Excess reserve ratio refers to the bank’s reserve that is more than what is required by the Federal Reserve. Therefore, option c is incorrect.

d.

Reserve requirement refers to the rules set by the government to decide on the required reserve ratio. Therefore, option d is incorrect.

e.

Monetary base is the sum of bank reserve and currency in circulation. Therefore, option e is incorrect.

Economics Concept Introduction

Reserve requirement: The rules set by the Federal Reserve where banks are required to holder certain percentage of deposits or to main reserve as per mentioned reserve ratio can be referred as reserve requirement.