Question

1. fractional reserve banking

the bank of canada sets the reserve requirement, which banks must meet through deposits at the bank of canada and cash held at the bank. what do banks deposits at the bank of canada achieve? check all that apply.
they ensure that banks cannot hoard money by holding too many reserves.
they help to facilitate transfers of funds between banks when a customer from one bank writes a cheque to a customer of another.
they help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash.
they mean that a bank must have one dollar of deposits for every dollar it lends.

Explanation:

1. Analyze each option:

• Option 1: Reserve requirements (including deposits at the central bank) are not about preventing hoarding of reserves; in fact, they set a minimum, not a maximum on reserves. So this is incorrect.
• Option 2: Deposits at the central bank (like the Bank of Canada) act as a clearinghouse mechanism. When a cheque is written between two banks, the funds can be transferred through these central bank deposits. This is correct.
• Option 3: Reserve requirements (deposits at central bank and cash on hand) ensure that banks have enough liquidity to meet withdrawal demands, which helps prevent bank runs by reassuring the public that banks can meet their obligations. This is correct.
• Option 4: Fractional reserve banking means banks can lend out a fraction of deposits, not one dollar of deposits for every dollar lent. So this is incorrect.

Answer:

B. They help to facilitate transfers of funds between banks when a customer from one bank writes a cheque to a customer of another.
C. They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash.