If the required reserve ratio is 10% and the market interest rate is 8%, what is Bolton Bank's opportunity cost of holding the excess reserves it is currently holding?
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Akash M.
The Federal Reserve is scheduled to pay interest on bank reserves. a. Suppose that the interest rate on reserves is I percentage point below market rates. Would banks still desire to minimize excess reserves? Would this affect the bank money equation in Summary point 8 above? b. Suppose that the interest rate on reserves is equal to the market rate. How would your answer to a change? c. Using your answer to $\mathbf{b},$ can you see why the relationship between reserves and bank money becomes very loose when market interest rates are zero (the "liquidity trap")?
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