Which of the following statements is true?
A)An increase in the liquidation costs of non-liquid assets encourages an FI to shift more funds into more liquid, lower yielding assets.
B)A decrease in the yield of non-liquid assets will reduce holdings of liquid assets due to higher opportunity costs of holding liquid assets.
C)The greater the volatility of the level of deposits, the greater the optimal proportion of reserve assets held to deposits.
D)An increase in the liquidation costs of non-liquid assets encourages an FI to reduce their holdings of more liquid, lower yielding assets.

Question

Quizplus · Accepted Answer

When liquidation costs of non-liquid assets (such as long-term bonds) increase, it becomes more difficult for FIs to sell them quickly and at a fair price. This makes FIs prefer more liquid assets, such as short-term bonds or cash reserves, even if they have lower yields. This helps to ensure that FIs can meet their obligations even if unexpected withdrawals occur.

Which of the Following Statements Is True