When banks use stored liquidity management,they
A)must pay interest on the funds that are stored.
B)store the funds at the U.S.Treasury.
C)necessarily increase the asset side of the balance sheet.
D)may shrink the balance sheet if cash is used as the liquidity adjustment mechanism.

Question

Quizplus · Accepted Answer

Stored liquidity management involves banks holding cash or other easily convertible assets to meet unexpected liquidity needs. If cash is used as the liquidity adjustment mechanism, it may reduce the size of the bank's balance sheet as the amount of cash held increases, which is known as balance sheet shrinkage. Therefore, the correct answer is D. Other options are not necessarily true as banks can store liquidity in various ways, including holding securities or deposits, and may or may not pay interest on those funds or necessarily increase the asset side of the balance sheet.

When Banks Use Stored Liquidity Management,they