Low-income nations may be considering the cost of holding excess reserves as an insurance premium against a future currency crisis. Economists have commented that holding:
A) excess reserves is necessary and prudent.
B) reserves is unnecessary because the economy can always switch to floating rates.
C) excess reserves to such an extent is much too costly for poor countries.
D) excess reserves makes little difference when looking at the entire economy.

Question

Quizplus · Accepted Answer

For low-income nations, holding excess reserves to a large extent can be very costly as it may mean diverting funds from much needed social and developmental spending. However, it is necessary to hold some reserves as insurance against currency crises, which can have severe consequences for the economy. Therefore, finding a balance between holding enough reserves for stability and ensuring socio-economic development is important.

Low-Income Nations May Be Considering the Cost of Holding Excess