How does the Federal Reserve utilize reserve requirements?

Question

A) Reserve requirements are set by the Fed to encourage saving and investing by consumers and businesses.
B) Reserve requirements are set by the Fed to regulate retirement portfolios for federal workers.
C) Reserve requirements are set by the Fed to balance the nation's budget.
D) Reserve requirements are set by the Fed to regulate the minimum amount that a commercial bank must hold in liquid assets.

Answer 1

D) Reserve requirements are set by the Fed to regulate the minimum amount that a commercial bank must hold in liquid assets.

The Federal Reserve sets reserve requirements to ensure that banks maintain a certain level of reserves (liquid assets) against their deposit liabilities, which helps to maintain the stability of the banking system. This regulation affects how much money banks can lend and thus influences the money supply and overall economic activity.