BANKING Flashcards
WHAT IS A COMMERCIAL
BANK?
IT IS AN INSTITUTION THAT GRANTS LOANS AND ACCEPTS DEPOSITS AND MAKE INVESTMENTS WITH THE AIM TO EARN PROFIT
WHY ARE COMMERCIAL BANKS CALLED THE BACKBONE OF THE COUNTRY
THEY ACT AS INTERMEDIARIES BETWEEN THOSE WHO DEPOSIT MONEY AND THOSE WHO WANT LOANS, THEY TAKE DEPOSITS FROM HOUSEHOLD SECTOR AND GRANT LOANS TO THE PRODUCTION SECTOR
WHAT IS MONEY CREATION OR CREDIT CREATION?
MONEY OR CREDIT CREATION MEANS THAT BANKS ARE ABLE TO CREATE EXCESS MONEY WHICH IS MORE THAN THE INITIAL DEPOSIT.
WHAT IS LEGAL RESERVE RATIO?
LEGAL RESERVE RATIO IS THE AMOUNT OF MONEY FROM THEIR TOTAL DEPOSITS WHICH THEY HAVE TO KEEP AS RESERVES WITH THEMSELVES
WHY DO BANKS KEEP ONLY A LITTLE AMOUNT WITH THEMSELVES?
1) BECAUSE NOT ALL PEOPLE HAVE TO WITHDRAW MONEY ON THE SAME DAY
2) CONSTANT FLOW OF NEW DEPOSITS
WHAT ARE THE ASSUMPTIONS OF CREDIT CREATION?
1) EVERY BANK IS INCLUDED IN ONE UNIT CALLED BANKS
2) EVERY TRANSACTION TAKES PLACE THROUGH THE BANK
WHEN DOES MONEY CREATION COME TO AN END?
WHEN THE INITIAL DEPOSIT EQUAL THE TOTAL CASH RESERVES
WHAT IS MONEY MULTIPLIER? WHAT IS ITS FORMULA?
MONEY MULTIPLIER IS THE AMOUNT BY WHICH MONEY HAS INCREASED FRO INTIAL DEPOSITS TOT AL CASH
