Banks hold reserves
A) to earn interest.
B) to increase profits.
C) to escape the double coincidence of wants.
D) to meet depositor withdrawals and payments.
E) only because the government requires them to hold reserves.

Question

Quizplus · Accepted Answer

Banks hold reserves mainly to meet the depositor withdrawals and payments. This is because banks are obligated to honor the withdrawal requests of their depositors. Holding reserves helps them ensure that they have enough funds to satisfy these demands. This is also why there are legal reserve requirements that dictate the minimum amount of reserves that banks must keep in order to cover a certain fraction of their deposits. The other choices are incorrect: A) Banks do earn interest on idle reserves, but this is not their primary motive for holding reserves. B) Reserves do not necessarily increase profits; banks earn profits by lending out money and earning interest. C) The double coincidence of wants refers to the need for two parties to have something that each other wants in order to engage in barter, and is not relevant to bank reserve holdings. E) While the government does set reserve requirements, banks would still likely choose to hold reserves regardless of legal mandates due to the need to meet depositor demands.

Banks Hold Reserves