Suppose that Bank of America pays a 4 % annual interest rate on checking account balances while having to meet a reserve requirement of 10%. Assume that the Fed pays Bank of America an interest rate of 0.3% on its holdings of reserves and that Bank of America can earn 6 % on its loans and other investments.

How do reserve requirements affect the amount that Bank of America can earn on $1,000 in checking account deposits? Ignore any costs Bank of America incurs on the deposits other than the interest it pays to depositors.

The 10% reserve requirement reduces the amount Bank of America can earn on $1,000 by $ . (Enter your answer rounded to two decimal places. )

Is the opportunity cost to banks of reserve requirements likely to be higher during a period of high inflation or during a period of low inflation?

A. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are high.

B. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are lower.

C. The opportunity cost to banks of reserve requirements would likely be higher during a period of high inflation when nominal interest rates on loans are lower.

D. The opportunity cost to banks of reserve requirements would likely be higher during a period of lower inflation when nominal interest rates on loans are high.