What determines the reserve requirement for a commercial bank?

• A. The bank sets its own reserve ratio.
• B. The central bank sets the reserve ratio as a percentage of liabilities.
• C. The market determines reserve ratios.
• D. The government sets the reserve ratio.

Answer: (B)

Reserve requirements are the rules that determine how much of a bank’s deposits must be held as reserves. The central bank sets this minimum reserve ratio as a percentage of liabilities, such as deposits. This is the best answer because the central bank uses reserve requirements as a monetary policy tool to influence how much banks can lend, thereby affecting the money supply and liquidity in the economy. Banks do not individually choose their own reserve ratios, the market does not set them, and while laws can govern the framework, the instrument itself is defined by the central bank. For example, if the reserve ratio is 10% and a bank has 100 million in deposits, it must hold 10 million in reserves, limiting its lending capacity and shaping the money multiplier.