Which of the Following Statements Is Best Describes Compensating Balances

question 101

Multiple Choice

Which of the following statements is best describes compensating balances?

• A) Compensating balance requirements apply only to businesses, not to individuals.
• B) Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.
• C) If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased.
• D) Banks are prohibited from earning interest on the compensating balances they hold.

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Definitions:

Desired Profit

The target amount of money a business aims to earn over a certain period.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.

Average Variable Cost

The total variable costs of production divided by the number of units produced, representing the variable cost per unit.

Store Traffic

The number of people who visit a retail location within a given time frame.