18e_Key_Question_Answers_Ch_32 - 32-2 32-4 32-8(Key...

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32-2 ( Key Question ) Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks but a liability to the Federal Reserve Banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves? Reserves provide the Fed a means of controlling the money supply. It is through increasing and decreasing excess reserves that the Fed is able to achieve a money supply of the size it thinks best for the economy. Reserves are assets of commercial banks because these funds are cash belonging to them; they are a claim the commercial banks have against the Federal Reserve Bank. Reserves deposited at the Fed are a liability to the Fed because they are funds it owes; they are claims that commercial banks have against it. Excess reserves are the amount by which actual reserves exceed required reserves: Excess reserves: Excess reserves = actual reserves - required reserves. Commercial banks can safely lend excess reserves, thereby increasing the money supply.
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This note was uploaded on 07/12/2011 for the course IS 301 taught by Professor Aleiss during the Spring '08 term at CSU Long Beach.

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18e_Key_Question_Answers_Ch_32 - 32-2 32-4 32-8(Key...

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