Banking

Question 1

What is a bank?

Answer 1

A financial intermediary between lenders and borrowers which benefits from economies of scale.

Question 2

What do economies of scale allow banks to do?

Answer 2

Economies of scale allow it to lend large sums at lower interest rates and with lower risks than an individual.

Question 3

What is the reserve rate requirement?

Answer 3

Also known as

Question 4

What are excess reserves?

Answer 4

The reserves that are left with the bank after the legal reserve requirement has been met.

Question 5

What does it mean when the bank lends money?

Answer 5

When the bank lends money, economists say that the bank has lended money or created credit, since it does not actually print money.

Question 6

What happens if two people come at the same time? What is this called?

Answer 6

The bank will shut down as they used the money to give credit. This is called a run on the bank

Question 7

What is a run on the bank?

Answer 7

The bank is unable to meet it’s obligations

Question 8

Why do banks continue to give credit if a run on the bank is possible?

Answer 8

Banks do not only have two customers so it is rare that everyone wants their money at one time.

Question 9

How does a bank earn revenue?

Answer 9

1. Interest rate spread - They charge more and pay less.

2. Investments

Question 10

What is the interest rate spread?

Answer 10

The different between the interest rate that the bank pays to depositors and the interest rate that it charges the borrowers.

Question 11

How can one be sure that his money is safe in the bank?

Answer 11

An insurance service is provided to the depositors.

Question 12

How can one be sure that his money is safe in the bank?

Answer 12

An insurance service is provided to the depositors. In the US for example, all your deposits are insured up to 250,000.

Question 13

What insures the deposits?

Answer 13

In the US it is the FDIC - Federal Deposit Insurance Corporation.

Question 14

Where does the money from the FDIC come from?

Answer 14

The banks pay a premium while they are running. Originally the FDIC had money from the government. Because most banks do not have a run on the bank, it works.

Question 15

If you are a millionaire what should you do?

Answer 15

Spread the money across multiple accounts.

Question 16

a

Answer 16

a

Question 17

A

Answer 17

a

Question 18

a

Answer 18

a

Question 19

Where was the first central bank made?

Answer 19

Sweden

Question 20

What does the central bank do?

Answer 20

1. Determines how much money will be printed
2. Acts as a banker to the banks
3. Acts as a banker to the government
4. It is the lender of last resort to the banks
5. It is the regulator and examiner
6. It is the cheque clearing centre
7. It intervenes in foreign exchange markets
8. It establishes exchange controls
9. In many developing countries it lends to industries, sectors and regions
10. It is the monetary policy authority

Question 21

What does x mean?

Answer 21

y

Question 22

What does x mean?

Answer 22

y

Question 23

What does x mean?

Answer 23

y

Question 24

What does x mean?

Answer 24

y

Question 25

What does x mean?

Answer 25

y

Question 26

What does regulator and examiner mean?

Answer 26

establishes rules and regulations

examines banks to ensure they follow regulations

Question 27

What do we mean by cheque clearing centre?

Answer 27

It doesn’t go from bank to bank

Question 28

What does it mean to intervene in foreign exchange markets?

Answer 28

if the exchange rate is too high or too low the central bank can buy currency or sell currency.

Question 29

What does x mean?

Answer 29

y

Question 30

What does x mean?

Answer 30

y

Question 31

What does x mean?

Answer 31

Monetary base in order to achieve the desired macro goal.

Question 32

What is the discount rate?

Answer 32

The name given to the rate of interest at which the central bank lends money to the banks

Question 33

What are open market operations?

Answer 33

Take place when the central bank goes into the financial market and buys or sells bonds. They are usually government bonds, but they could also be corporate bonds.

Question 34

What do you want to do when you are in a deflationary gap?

Answer 34

increase aggregate demand, shift it to the right

Question 35

Why increase money supply?

Answer 35

Solves deflationary gap
decrease reserve ratio
decrease discount rate
buy bonds

Question 36

.

Answer 36

Designes to impact the purpose of qhich money is lent or borrowed