U.S. Banking in the 20th Century Quick Check

Question

5 of 55 of 5 Items
Question
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)
Responses

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

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 store a smaller percentage of depositor funds as reserves, they have less cash on hand to meet withdrawal demands from depositors. This can increase the likelihood of a liquidity crisis if many depositors request their money at the same time, as the bank may not have sufficient funds available to cover those withdrawals.