The primary purpose of the legal reserve requirement is to:
A) prevent banks from hoarding too much vault cash.
B) provide a means by which the monetary authorities can influence the lending ability of commercial banks.
C) prevent commercial banks from earning excess profits.
D) provide a dependable source of interest income for commercial banks.

Question

Quizplus · Accepted Answer

The legal reserve requirement is a regulation that mandates commercial banks to hold a certain percentage of their deposits as reserves in the form of vault cash or deposits with the central bank. By adjusting this requirement, the monetary authorities can influence the lending ability of banks, which in turn affects the money supply and inflation. The other options are not accurate because the legal reserve requirement is not related to preventing hoarding of cash, restricting profits, or providing a source of interest income for banks.

The Primary Purpose of the Legal Reserve Requirement Is To