When the Fed requires banks to maintain reserves,it is defined as:
A)M1 plus balances in some savings accounts and money market mutuals.
B)cash in their vaults plus deposits at district Federal Reserve banks or other banks.
C)just cash in their vaults.
D)M2 minus M1.

Question

Quizplus · Accepted Answer

When the Fed requires banks to maintain reserves, they are required to hold a certain amount of cash in their vaults and also maintain deposits at district Federal Reserve banks or other banks. This is known as required reserve ratio (RRR) and is a tool used by the Fed to control the money supply. Choice A (M1 plus balances in some savings accounts and money market mutuals) is incorrect as it defines the M2 money supply measure, not required reserves. Choice C (just cash in their vaults) is incorrect as it does not consider the deposits at Federal Reserve banks. Choice D (M2 minus M1) is also incorrect as it defines the M3 money supply measure, not required reserves.

When the Fed Requires Banks to Maintain Reserves,it Is Defined