Question 31
Financial InstitutionsThe basic purpose of imposing legal reserve requirements on commercial banks is to
- A.assure the profitability of commercial banks
- B.provide a device through which credit creation by banks can be controlled
- C.provide a proper ratio between earning and non-earning bank assets
- D.provide the Central Bank with working capital
Show the answer and explanation
Answer: B (provide a device through which credit creation by banks can be controlled)
Explanation
The higher the reserve the banks must keep, the less they can lend, so the Central Bank uses the requirement to control credit creation.