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A reserve requirement obliges a bank to do what?
ALend a set share of its deposits to small businesses
BHold part of its deposits as cash or with the central bank
CInsure every deposit account above an agreed ceiling
DKeep a set share of its assets in government bonds
Answer & Solution
Correct answer: B. Hold part of its deposits as cash or with the central bank
1. A reserve requirement obliges member banks to hold some of their deposits rather than lend them all out.
2. Those held deposits sit as cash in the bank vault or in an account at the central bank.
3. Because the requirement is set on deposits, it directly limits how much of each deposit can be lent.
4. Directed lending to particular borrowers is a credit policy, not what a reserve requirement asks for.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.2 The Federal Reserve System_
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