Because Depository Institutions Earn No Interest on Reserves

question 49

Multiple Choice

Because depository institutions earn no interest on reserves:

• A)profit maximizing behavior motivates them to lend out excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are high, this motivation is especially strong.
• B)profit maximizing behavior motivates them to lend out excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are low, this motivation is especially strong.
• C)profit maximizing behavior motivates them to retain excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are low, this motivation is especially strong.
• D)profit maximizing behavior motivates them to retain excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are high, this motivation is especially strong.
• E)none of the above

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Definitions:

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, reflective of its sensitivity to price changes.

Price Elasticity

An indicator of consumer sensitivity to price fluctuations, represented by the extent to which demand for a product varies in response to its price adjustments.

Pay-As-You-Go Principle

A financing method where expenditures are not financed by borrowing but from current revenues.

Federal Reserve

The central banking system of the United States, responsible for monetary policy, banking supervision, and financial services.