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

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.

When banks are required to hold a smaller percentage of depositor funds, they have less cash available to meet withdrawal demands from depositors. This situation can lead to a liquidity crisis if a large number of depositors attempt to withdraw their funds simultaneously, as the banks may not have enough liquid assets to cover these withdrawals.