Commercial bank reserves at the Central Bank____________

Analyze the question: The question is about why commercial banks keep reserves (deposits) at the Central Bank. The wording is garbled, but the idea is: what is the purpose or effect of these reserves?

Explain the concept: Commercial banks are required to keep a certain percentage of their deposits as reserves with the Central Bank. In Nigeria, this is the Cash Reserve Requirement (CRR). The Central Bank of Nigeria uses it as a tool of monetary policy.

• Raising the CRR means banks have less money to lend. Credit shrinks and the money supply falls, which helps control inflation.
• Lowering the CRR means banks have more money to lend. Credit expands and the money supply rises, which stimulates the economy.

Reserves also act as a safeguard for depositors, but the main economic function is monetary control.

Step-by-step solution:

1. A. Advancing trade prospects. This is not the direct purpose of reserves. It is an indirect effect at best.
2. B. Controlling credit and money supply. This is correct. Reserve requirements directly limit how much banks can lend, so they regulate credit creation and the money supply.
3. C. Reducing bank frauds. Reserves do not prevent fraud. Auditing and regulation do that.
4. D. Discouraging banking operations. This is wrong. Reserves are meant to keep banking stable, not to discourage it.

Answer: B. controlling credit and money supply

Exam tip: When you see "reserves at the Central Bank", think CRR → credit control → money supply. Remember: "Reserves Restrict Lending." Any option that mentions controlling credit or money supply is usually the right one in questions about monetary policy tools (CRR, Open Market Operations, Bank Rate, Liquidity Ratio).