The basic purpose of imposing legal reserve requirements on commercial banks is to:
A) Assure the liquidity of commercial banks
B) Provide a device through which the credit-creating activities of banks can be controlled
C) Provide a proper ratio between earning and no earning bank assets
D) Provide the central banks with necessary working capital

Question

Quizplus · Accepted Answer

Legal reserve requirements are designed to control the credit-creating activities of banks. By requiring banks to hold a certain percentage of their deposits as reserves, central banks can limit the amount of money that banks can create through lending. This helps to maintain stability in the financial system and prevent inflationary pressures. While legal reserve requirements may also help to assure the liquidity of commercial banks and provide a proper ratio between earning and non-earning bank assets, their primary purpose is to control credit creation. Legal reserve requirements do not provide central banks with necessary working capital, as central banks can create their own reserves through open market operations and other monetary policy tools.

The Basic Purpose of Imposing Legal Reserve Requirements on Commercial