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 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 smaller 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 larger percentage of depositor funds in their vaults

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 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 smaller 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 larger percentage of depositor funds in their vaults

Answer 1

Banks in need of cash are offered low-interest loans from other banks. Banks are required to store a smaller percentage of depositor funds in their vaults.

Answer 2

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.

Answer 3

To determine which policy would increase the risk of a liquidity crisis, let's analyze each of the options.

1. "Banks in need of cash are offered low-interest loans from the Federal Reserve."
This policy would decrease the risk of a liquidity crisis as it provides banks with access to a source of cash when they need it. It helps stabilize the financial system in times of crisis by ensuring that banks have sufficient funds to meet their obligations.

2. "Banks in need of cash are offered low-interest loans from other banks."
Similar to the previous policy, this option would also decrease the risk of a liquidity crisis. It allows banks to borrow from other banks, which can provide a short-term solution to meet their cash needs.

3. "Banks are required to store a smaller percentage of depositor funds in their vaults."
This policy involves reducing the reserve requirements for banks, meaning they are required to keep less money in their vaults in proportion to their deposits. While this may provide banks with more flexibility to lend and invest, it also increases the risk of a liquidity crisis. If too many depositors request their funds at once, the bank may struggle to meet the demand due to insufficient reserves.

4. "Banks are required to store a larger percentage of depositor funds in their vaults."
Contrary to the previous option, this policy involves increasing the reserve requirements for banks. By requiring banks to hold a larger percentage of depositor funds in their vaults, it reduces the amount of money available for lending and investment. This could exacerbate the risk of a liquidity crisis as banks may find it harder to access cash when needed.

Therefore, options 3 and 4 would increase the risk of a liquidity crisis since they involve changes in reserve requirements that could hinder banks' ability to meet depositors' demands for cash.