Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

Which entity has the authority to require financial reserves from depository institutions?

1. The Treasury Department

2. The Federal Reserve

3. The Securities and Exchange Commission

4. The Federal Deposit Insurance Corporation

The correct answer is: The Federal Reserve

The Federal Reserve has the authority to require financial reserves from depository institutions as part of its role in the monetary policy of the United States. This responsibility is primarily focused on ensuring the stability and liquidity of the banking system. By mandating reserve requirements, the Federal Reserve can influence the amount of money that banks can lend, which directly affects the economy's overall credit availability and economic growth. When the Federal Reserve sets a reserve requirement, it determines the percentage of deposits that banks must hold in reserve and not lend out. These reserves are typically held in cash or as deposits with the Federal Reserve. This mechanism allows the Federal Reserve to control monetary supply and can help prevent economic issues such as inflation or bank runs. In contrast, other entities mentioned serve different purposes. The Treasury Department is involved mainly in fiscal policy and the management of federal finances, including issuing debt. The Securities and Exchange Commission primarily regulates securities markets and protects investors. The Federal Deposit Insurance Corporation, while it insures deposits in banks and savings associations, does not have the authority to set reserve requirements. Therefore, the Federal Reserve is the correct entity responsible for this regulatory function.