Banks are currently required to hold at least 10% of their checking deposits as reserves.

a. Many bankers would prefer that the required reserve ratio be lowered to 0% (as in Canada and England, where there are no reserve requirements). Explain why this would tend to make the banks more profitable.

b. In the 1960s the federal funds market (i.e., the overnight interbank loan market) became very well developed, and banks began to hold fewer excess reserves. Explain why a well-developed federal funds market would induce banks to hold fewer excess reserves.

c. In 2008 the Fed began paying interest on banks’ reserves. Explain how the new policy might have induced banks to hold more excess reserves (as in fact they did).