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:

Organ of Corti

The sensory organ located within the cochlea of the inner ear, responsible for converting sound vibrations into nerve impulses.

Retina

A layer at the back of the eyeball containing cells sensitive to light, which trigger nerve impulses that pass via the optic nerve to the brain.

Rods and Cones

Photoreceptor cells in the retina of the eye where rods are responsible for vision at low light levels, and cones handle color vision and detail.

Olfactory Cells

Sensory cells located in the olfactory epithelium of the nose involved in the detection of odors, playing a key role in the sense of smell.