Question

Select the statement that best defines required reserves.

The amount banks are required by law to hold on each mortgage.

The amount of reserves a bank must keep on deposit at the Fed or in their vault on a given deposit.

The amount of reserves a bank has below the required amount.

The amount of reserves banks have on hand to handle litigation.

Answer 1

The amount of reserves a bank must keep on deposit at the Fed or in the vault on a given deposit

Required reserves are the proportion of all deposits that a bank must hold on deposit with the Fed, or in its vault. Its proportion is called the required reverse ratio and is determined by the Fed. If the required reserve ratio is 10%, this means that for every $1 deposited in the bank, the bank is required to hold back $0.10 of that deposit. Required reserves cannot be loaned out or otherwise invested.