A depository institution that keeps federal funds in excess of the amount required incurs ________, which is the loss of interest income that could be earned on the excess reserves.

Question

Quizplus · Accepted Answer

The described situation incurs an opportunity cost, which is the cost of forgoing the interest income that could be earned on the excess reserves. This cost arises from the fact that the depository institution could have invested or lent out the excess funds to earn interest, but instead chose to hold them in reserve. Option A is incorrect because federal funds cost refers to the interest rate that banks pay to borrow money from other banks in the federal funds market. Option B is inaccurate because interest income cost is not a commonly used term in finance or economics. Option D is incorrect because the situation described incurs a real cost.

A Depository Institution That Keeps Federal Funds in Excess of the Amount