Asked by Chelsea Valencia on May 28, 2024
Verified
Statement I: When the Fed sells U.S.government securities on the open market,excess reserves are increased.
Statement II: Banks try to carry large balances of excess reserves.
A) Statement I is true and statement II is false.
B) Statement II is true and statement I is false.
C) Both statements are true.
D) Both statements are false.
Open Market
An economic system with no barriers to free market activities, where securities, goods, and services can be traded openly.
Excess Reserves
The amount of reserves that a bank holds beyond the minimum required by regulation or central bank policy, which can be loaned out to generate profit.
Federal Reserve
The Federal Reserve, often referred to as the Fed, is the central banking system of the United States, responsible for setting monetary policy, regulating banks, maintaining financial stability, and providing banking services to government institutions.
- Familiarize oneself with the processes involved in open market operations and their relevance to monetary policy strategies.
Verified Answer
ZK
Zybrea KnightJun 03, 2024
Final Answer :
D
Explanation :
Statement I is false because when the Fed sells U.S. government securities on the open market, it actually decreases excess reserves in the banking system by taking cash out of circulation. Statement II is false because banks typically try to minimize excess reserves to maximize their profits, as holding large balances of excess reserves represents an opportunity cost of not earning higher returns through loans or investments.
Learning Objectives
- Familiarize oneself with the processes involved in open market operations and their relevance to monetary policy strategies.