Chapter 15, Problem 13AA

To determine

To find:The reason for banks keep money in reserve accounts.

Explanation of Solution

Fed has set reserve requirement for banks by which they are required to maintain certain amount of checkable deposits with them as reserves. Banks need to maintain amount in reserve accounts as many of the customers of banks want to withdraw larger amounts in form of cash from their checking accounts.

It is not said that the banks have to keep 100 percent of their deposits in reserve. The amount maintained in reserves by banks can be used to create new money. The portion of reserves that is not required can be used by banks to provide loans to other businesses or individuals, this is multiple expansion of money supply.

Economics Concept Introduction

Introduction:

Reserve requirements-Federal Reserve has set regulations for reserve requirements by which banks are required to maintain a specific percentage of their checkable deposits as cash with them. This amount can also be maintained as deposits in the Federal Reserve district banks.