According to the bank reserve equation, the largest factor supplying reserves to the banking system is
A) Federal Reserve purchases of government securities.
B) Treasury currency outstanding.
C) float.
D) currency in circulation.

Question

Quizplus · Accepted Answer

The bank reserve equation is Reserves = Currency in circulation + Bank Deposits x Reserve Requirement. As such, the largest factor supplying reserves to the banking system is Federal Reserve purchases of government securities, as this increases the amount of reserves held by banks. Treasury currency outstanding and currency in circulation both refer to the amount of physical cash in circulation, which does not directly affect bank reserves. Float refers to the time it takes for checks to clear, and while it can affect reserve balances temporarily, it is not a significant factor in the long-term.

According to the Bank Reserve Equation, the Largest Factor Supplying