Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax increase as interest rates rise? A. As interest rates rise, banks could earn more money by lending reserves to borrowers. These profits are limited by the reserve requirement, and the foregone profits increase as the interest rate rises. B. States tend to increase franchise fees on banks as interest rates rise C. The Fed always increases the reserve requirement as interest rates rise D. Banks earn more money as interest rates increase, so their state and federal income taxes increase.
Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax increase as interest rates rise?
| A. |
As interest rates rise, banks could earn more money by lending reserves to borrowers. These profits are limited by the reserve requirement, and the foregone profits increase as the interest rate rises. |
|
| B. |
States tend to increase franchise fees on banks as interest rates rise |
|
| C. |
The Fed always increases the reserve requirement as interest rates rise |
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| D. |
Banks earn more money as interest rates increase, so their state and federal income taxes increase. |
As interest rates rise, banks could earn more money by lending reserves to borrowers. These profits are limited by the reserve requirement, and the foregone profits increase as the interest rate rises.
- Practice of lending customers' money to others on the assumption that not all customers will want all Of their money back at any one time is known as fractional reserve banking
-Suppose that the bankers in an economy come to the view that they need to retain only 10 percent of any money deposited with them. This is known as the reserve requirement.
-The amount Of money that the banking system creates through the practice Of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier.
-When reserve requirements increase, the money multiplier decrease and the bank will be able to lend less amount of money and earn lower profits.
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