Which financial innovation allows banks to avoid reserve requirements and to pay interest on deposits? A....

Which financial innovation allows banks to avoid reserve requirements and to pay interest on deposits?

	A.	Money market funds
	B.	Sweep accounts
	C.	Both money market funds and sweep accounts

Solutions

Expert Solution

The following financial innovation allows banks to avoid reserve requirements and to pay interest on deposits:

C. Both money market funds and sweep accounts

Money Market Funds are short-term debt funds that invest only in highly liquid money market instruments with an average maturity of one year. These funds offer high liquidity with a very low level of risk.

A Sweep account is an account held at a bank or other financial institution where the funds that exceed or fall short of a certain level, are automatically transferred from an account, having a very low rate of interest, into a higher interest -earning investment account at the end of each business day. An auto -sweep account generates more interest to customers.

Both money market funds and sweep accounts allows banks to avoid reserve requirements and to pay interest on deposits and it is possible because of change in technology. As these two types of financial innovation generates high level of interest with low level of risks, banks can avoid reserve requirements.

Rahul Sunny answered 2 months ago

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