Which of the Following Statements Best Describes Compensating Balances

question 38

Multiple Choice

Which of the following statements 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:

Peptic

Pertaining to digestion; can also refer to an ulcer of the upper digestive tract.

Gastric Ulcer

A sore or lesion that develops on the lining of the stomach, often resulting from infection with H. pylori bacteria or prolonged use of NSAIDs.

Stomach Ulcer

A sore that develops on the lining of the stomach or the small intestine, often caused by infection with H. pylori bacteria or prolonged use of NSAIDs.

Duodenum

The first segment of the small intestine.