Choose the correct answer:
A)Regulatory taxes such as reserve requirements create an incentive for banks to remove loans from the balance sheet by selling them without recourse to outside parties.
B)Regulatory taxes such as reserve requirements create an incentive for banks to offer low rate mortgages.
C)Regulatory taxes such as reserve requirements create an incentive for banks limit their lending to large corporates only.
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

Regulatory taxes such as reserve requirements require banks to hold a certain percentage of their deposits in reserves, which means they have less money to lend out. As a result, banks may choose to remove loans from their balance sheets by selling them without recourse to outside parties in order to free up capital for other lending activities. This can be seen as an incentive created by regulatory taxes. Option B is incorrect because reserve requirements do not influence the interest rates on mortgages. Option C is incorrect because reserve requirements do not encourage banks to limit their lending to large corporates only. Option D is incorrect because option A is the correct answer.

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