Answer: The correct answer is choice C.
Explanation: The primary purpose of the legal reserve requirement is to provide a means by which monetary authorities can influence the lending ability of commercial banks. These policies are the way in which the Federal Reserve can control the money supply.
C) Provide a means by which the monetary authorities can influence the lending ability of commercial banks.
Legal reserve requirement is one of the tools of monetary policy use by federal government to regulate the supply of money in an economy. It is a device through which the credit-creating activities of banks can be controlled.
Suppose the central bank intends to cut the money supply in an economy, it will increase the legal reserve requirement hence mop up excess cash held by commercial banks thereby reduces their lending rate.
Where the central bank reduces the legal reserve requirement, then commercial banks will be able to lend to the public due to the availability of cash.
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