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:

Public Choice Analysis

A field of economics that studies how economic theory and methodologies apply to the public sector, analyzing government behavior and decision-making processes.

Logically Consistent Theory

A theory in which the statements and principles are coherently aligned and do not lead to any contradictions or inconsistencies.

Individual Actors

Entities or persons that act independently within an economic system, making decisions based on personal interests or goals.

Politicians

Individuals engaged in directing or influencing government policy and decision-making.