Question

The dollar amount of reserves a bank is obligated by regulation to hold as cash in the bank's vault or on account at the Fed (i.e. Federal Reserve) is known as:

Select one:

a. excess reserves

b. required reserves

c. prime rate

Answer 1

The dollar amount of reserves a bank is obligated by regulation to hold as cash in the bank's vault or on account at the Fed is known as required reserve and this amount is necessary for the banks to deposit in the Federal Reserve and this works according to the reserve ratio and that is the reason why it can be mentioned that

(b) required reserves is the answer to this question

excess reserves are not obligated by the Federal Reserve where the banks can withdraw them anytime

Therefore (a) is wrong

Here prime rate is related to the rate at which banks lend to the customer

Therefore (c) is wrong.