Which Statement Best Describes Compensating Balances

question 43

Multiple Choice

Which statement 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:

Per-Unit Taxes

Taxes that are charged on a per-item basis, often levied on specific goods or services, such as gasoline or cigarettes.

Medicare & Medicaid

Federal programs in the United States that provide health coverage; Medicare serves older adults and some younger disabled individuals, while Medicaid assists low-income people.

Progressive Tax Structure

A tax system in which the tax rate increases as the taxable amount or income increases, placing a heavier burden on those who can afford to pay more.

Marginal Tax Rate

The rate at which an additional dollar of income is taxed.