The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may
A)penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk.
B)benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk.
C)lead to increased withdrawals by depositors that do not meet the minimum requirement.
D)assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations.
E)None of the options.

Question

Quizplus · Accepted Answer

Constrained optimization involves finding the optimal solution subject to constraints. In this case, the FI manager is constrained by the minimum amount of liquid reserve assets required by regulators. If the actual withdrawal risk is higher than the minimum requirement, the FI may be penalized for not holding enough reserves to mitigate the risk, which is why option A is the correct answer. Option B is incorrect because holding more reserves than necessary could lead to lower profitability for the FI. Option C is incorrect because the minimum requirement does not necessarily affect withdrawal behavior. Option D is incorrect because the actual withdrawal expectations may deviate from the optimal target amount.

The Concept of Constrained Optimization Facing an FI Manager Involving