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Suppose a bank discovers its reserves will temporarily fall slightly short of those legally required. How...

Suppose a bank discovers its reserves will temporarily fall slightly short of those legally required. How might it remedy this situation through the Federal funds market? Now assume the bank finds that its reserves will be substantially and permanently deficient. What remedy is available to this bank?

Be sure to answer the question fully and mention all remedies.

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Answer #1

If the bank discovers its reserves will temporarily fall slightly short of those legally required then this bank can borrow from the other banks that are having the excess reserve above the legal requirement set by the central bank and pay the interest rate on the borrowing amount, therefore, this way the bank can maintain its reserves set by the central bank.

On the other hand, if the bank is unable to meet the reserve requirement permanently then this bank should immediately stop lending the money to potential borrowers and start recovering the loan made previously and the bank should continuously carry on doing this until the bank is able to maintain the reserve requirements.

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