Because depository institutions earn no interest on reserves
A) profit maximizing behavior motivates them to lend out excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are high, this motivation is especially strong.
B) profit maximizing behavior motivates them to lend out excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are low, this motivation is especially strong.
C) profit maximizing behavior motivates them to retain excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are low, this motivation is especially strong.
D) profit maximizing behavior motivates them to retain excess reserves to the fullest extent consistent with their liquidity requirements; and when interest rates are high, this motivation is especially strong.

Question

Quizplus · Accepted Answer

Depository institutions aim to maximize profits by lending out excess reserves as much as possible, given their need for liquidity. When interest rates are high, the incentive to lend is stronger because they can earn more interest on loans.

Because Depository Institutions Earn No Interest on Reserves