Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax...

Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax increase as interest rates rise?

	A.	States tend to increase franchise fees on banks as interest rates rise
	B.	As interest rates rise, banks could earn more money by lending reserves to borrowers. These profits are limited by the reserve requirement, and the foregone profits increase as the interest rate rises.
	C.	The Fed always increases the reserve requirement as interest rates rise
	D.	Banks earn more money as interest rates increase, so their state and federal income taxes increase.

Expert Solution

Rahul Sunny answered 9 months ago

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