Which of the following statements is correct?
A)Compensating balance requirements apply only to businesses, not to individuals.
B)Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.
C)If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased.
D)Banks are prohibited from earning interest on the funds they force businesses to keep as compensating balances.
E)All of the above statements are correct.

Question

Quizplus · Accepted Answer

Choice A is incorrect because compensating balance requirements can apply to both businesses and individuals. Choice B is incorrect because compensating balances do have an opportunity cost for firms, as it restricts their ability to use the funds for other purposes. Choice D is incorrect because banks are allowed to earn interest on compensating balances held by businesses. Choice E is incorrect because only choice C is correct.

Which of the Following Statements Is Correct