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:

Myth

A traditional story, especially one concerning the early history of a people or explaining a natural or social phenomenon, and typically involving supernatural beings or events.

Symbolic Meaning

The significance that objects, events, and entities bear beyond their literal meaning, often culturally defined.

Cultural Truth

Underlying beliefs and values that are widely accepted within a specific culture.

Monomyth

denotes a universal pattern found in narratives worldwide, typically involving a hero's journey through trials, achieving a goal or transformation.