If There Were an Increase in the Number of Bank

question 107

Multiple Choice

If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to:

• A) decrease.
• B) increase.
• C) not change.
• D) decrease since failing banks lost theirs.

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Definitions:

Compensating Balances

Minimum balances that a business must maintain in its bank account as part of a borrowing arrangement with the bank.

Precautionary Balances

Cash balances held in reserve for random, unforeseen fluctuations in cash inflows and outflows.

EOQ Model

Economic Order Quantity, an inventory management model that determines the optimal order quantity to minimize total inventory costs, including holding and ordering costs.

Safety Stock

A level of extra inventory maintained to mitigate the risk of stockouts caused by variations in supply and demand.