Question

1.6 In the banking system, the required reserve ratio measures the percentage of total liabilities that the bank must keep on reserve. the percentage of total deposits that the bank must keep on reserve. the amount by which the money supply will change if bank reserves change. the amount by which the bank reserves will change if deposits change.

Answer 1

The correct answer is Option B. In the banking system, the required reserve ratio measures the percentage of total deposits that the bank must keep on reserve.

• Required reserve ratio is the percentage of total deposits held by a commercial bank which the commercial bank has to keep with itself in cash in case of mass consumer withdraw money out of banks and not to lend out. The rate of required reserve is determined by a country's central bank i.e. Federal Reserve in United States. For eg - a commercial bank has total deposits of $23,000 and rate of required reserve ratio is 10%. Then, the required reserve ratio will be 23,000×10% = $ 2,300, which has to be kept reserve.

• Required reserve is also an important tool for Central bank to control money supply and inflation. When it wants to reduce money supply and control inflation, it hikes up the requires reseve rates and when central bank wants to increase money supply and battle recession, it lowers the required reserve rates.

• Therefore, option B is correct which states that required reserve ratio is the percentage of total deposits that the bank must keep in reserve.

Other Options A, C and D fails to provide the correct explanation of required reserve ratio as they state it as a percentage of liabilities or as the amount that changes the money supply, which is incorrect.