Which of the following is true? The higher the cost associated with deposit outflows, the fewer...

Which of the following is true?

The higher the cost associated with deposit outflows, the fewer excess reserves banks will want to hold.

One of the least costly ways for a bank to meet withdrawals if it runs short of funds, is to sell loans.

If a bank has sufficient excess reserves, deposit withdrawals will require no other changes in its balance sheet.

An increase in excess reserves reduces liquidity risk and raises a bank's return on its assets.

Solutions

Expert Solution

One of the least costly ways for a bank to meet withdrawals if it runs short of funds is to sell loans.

Explanation: Banks often sell their loans when they need funds to meet withdrawal requirements.

When the cost associated with deposit outflows increases, banks want to keep more excess reserves.

Even if a bank has sufficient reserves, its liabilities fall when deposit withdrawals take place as deposits are liabilities of a bank.

Excess reserves can lower liquidity risks but it lowers the retuns on assets as well as some of the assets are not learning any return.

Rahul Sunny answered 1 year ago

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