When a central bank sets reserve requirements for commercial banks, what do these rules mandate regarding reserves as a minimum proportion?
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Answer: B. deposits
Explanation
Reserve requirements dictate the minimum fraction of customer funds banks must hold. These rules ensure commercial institutions maintain adequate liquidity for daily withdrawals. Option B is correct because reserve requirements apply to customer deposits. Central banks use reserve ratio adjustments as a monetary policy tool to control credit. Fractional reserve banking allows banks to lend out the majority of deposited funds. Holding reserves prevents devastating bank runs during periods of financial panic.
Commercial banks manage liquidity carefully to comply with statutory reserve mandates. Lowering reserve requirements allows banks to expand lending and boost money supply. Central bank oversight maintains stability across the broader national banking system. Assets represent a broader category including loans and investments, not just reserves. Loans are issued by banks rather than serving as the baseline for reserve holdings. Government bonds are securities held by banks but are distinct from deposit reserves.
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