Which of the following statements is true?
A)In theory, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out that amount by liquidating an equivalent amount of asset on any banking day.
B)In practice, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out that amount by liquidating an equivalent amount of asset on any banking day.
C)In theory, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out half of that amount by liquidating an equivalent amount of asset on any banking day.
D)In practice, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out half of that amount by liquidating an equivalent amount of asset on any banking day.

Question

Quizplus · Accepted Answer

The statement "In theory, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out that amount by liquidating an equivalent amount of asset on any banking day" is true. This is because demand deposits are considered as part of the monetary base and must be available for immediate withdrawal by the depositor. In practice, however, banks may hold excess reserves to ensure that they can meet the demand for withdrawals without having to liquidate all their assets. Therefore, statement B, C, and D are all false.

Which of the Following Statements Is True