The basic purpose of imposing legal reserve requirements on commercial banks is to
A) assure the liquidity of commercial banks.
B) provide a device through which the credit-creating activities of banks can be controlled.
C) provide a proper ratio between earning and no-earning bank assets.
D) provide the central banks with necessary working capital.

Question

Quizplus · Accepted Answer

Legal reserve requirements are used as a tool to regulate and control credit creation by commercial banks. By setting a minimum percentage of deposits that must be held in reserve, central banks can limit the amount of new loans that banks can make, thereby controlling the money supply and inflation. This also helps to prevent bank runs and ensure the stability of the banking system. Assuring liquidity, maintaining a proper ratio between earning and non-earning assets, and providing working capital to the central bank are other potential benefits of legal reserve requirements, but they are not the primary purpose.

The Basic Purpose of Imposing Legal Reserve Requirements on Commercial