ECONOMICS
ECONOMIC INSTITUTIONS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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To build larger bank buildings.
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To put pressure on government officials.
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To increase their capacity to lend.
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To allow for more investments.
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To pay bank employees more.
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Detailed explanation-1: -Banks advertise to attract depositors, and they pay interest on the funds. What good are our deposits to the bank? The answer is that while banks do not need the deposits to create loans, they do need to balance their books; and attracting customer deposits is usually the cheapest way to do it.
Detailed explanation-2: -Every time a dollar is deposited into a bank account, a bank’s total reserves increases. The bank will keep some of it on hand as required reserves, but it will loan the excess reserves out. When that loan is made, it increases the money supply.
Detailed explanation-3: -Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending.
Detailed explanation-4: -As interest rates rise, households and other depositors may move their deposits to higher yielding MMFs.