A significant amount of legislation passed in the 20th century sought to reduce the risk of future economic events like the liquidity crisis experienced by banks during the Panic of 1907. Which of the following policies would increase the risk of a liquidity crisis?(1 point)

Question

Responses

Banks are required to store a smaller percentage of depositor funds in their vaults.
Banks are required to store a smaller percentage of depositor funds in their vaults.

Banks in need of cash are offered low-interest loans from the Federal Reserve.
Banks in need of cash are offered low-interest loans from the Federal Reserve.

Banks in need of cash are offered low-interest loans from other banks.
Banks in need of cash are offered low-interest loans from other banks.

Banks are required to store a larger percentage of depositor funds in their vaults.
Banks are required to store a larger percentage of depositor funds in their vaults.

Answer 1

The policy that would increase the risk of a liquidity crisis is:

Banks are required to store a smaller percentage of depositor funds in their vaults.

This policy would reduce the reserves that banks have on hand to meet withdrawal demands, potentially leading to a situation where banks do not have enough liquid assets to cover depositor withdrawals, thereby increasing the risk of a liquidity crisis.