Banks perform two essential functions for the macro economy. These are: They set
ID: 1119026 • Letter: B
Question
Banks perform two essential functions for the macro economy. These are:
They set interest rates and nominate the Fed's Board of Governors.
Banks transfer money from savers to spenders. And, the banking system creates additional money by making loans in excess of total (system) reserves.
Set the discount rate of interest and the fed funds rate of interest.
They provide FDIC and control little r (the reserve ratio).
a.They set interest rates and nominate the Fed's Board of Governors.
b.Banks transfer money from savers to spenders. And, the banking system creates additional money by making loans in excess of total (system) reserves.
c.Set the discount rate of interest and the fed funds rate of interest.
d.They provide FDIC and control little r (the reserve ratio).
Explanation / Answer
1).Banks perform the task of an intermediary, connecting the savers with the borrowers. This is its primary task. In fact the banking started for this reason. Peolple with idle money needed a safe place to put their money. On the other hand, people in need of money were ready to pay interest on loaned money, Therefore, there was this opportunity to connect these two and earn.
2).Money multiplier role of banks. Here banks lend money (except reserve requirements) which will again be deposited in the some other bank. But for the banking system as a whole, the amount of deposits would increase. This process continues creating a multiplier impact on money supply in the economy. All this is because of lending function of the bank.
Thus, both these functions are performed by banks. So Option 2 is correct.
Other options are incorrect because:-
Interest rates on bonds are market determined and fed's governors are elected by govt of US. While , interest rates on fed funds are decided by fed itself. Rserve ratio is also decided by fed.
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