ECON 0110 Lecture Notes - Bank Failure, Savings And Loan Association, Federal Deposit Insurance Corporation

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ivorycrab866

27 Feb 2014

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Banks earn profits by borrowing money from depositors and lending the money to borrowers at higher interest rates than they pay to depositors. Banks also earn profits by charging fees for services. Checking account fees, atm fees, estate and trust planning. Functions of banks: provide safekeeping for depositors" money, make loans, as a group, banks create money. Banks lend out most of the money that has been deposited. Banks retain some of the deposits in its vault. Some of the deposits might be deposited at the local branch of the federal reserve system for safety purposes. The cash that a bank has in its vault plus any deposits that a bank has at the federal reserve. Banks earn no interest on reserves sitting in the vault or at the fed. To generate profits, banks lend most of the money that has been deposited.

Related Questions

QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

indigobutterfly708

The isolated nation of Islandia currently does not trade with other countries. The banking system of Islandia consists of four commercial banks' these banks deal with consumers and businesses and one central bank that deals exclusively with the commercial banks. The central bank has set a reserve requirement of 10 percent. The banks are creatively named First Bank, Second Bank, Third Bank, and Fourth Bank. All of the commercial banks, except First Bank, have used all of their excess reserves to issue loans to consumers and businesses. First Bank is holding $288,000 in excess reserves.

Suppose First Bank loans all of its excess reserves to a customer to buy a custom-built house. The home builder deposits all of the money received for building the house into Second Bank, which then lends all its excess reserves to a customer to buy machines for her factory. The machine manufacturer deposits all of the money received into Third Bank, which lends all its excess reserves to a clothing maker to buy textiles. The textile manufacturer deposits all of the money received into Fourth Bank, which lends all its excess reserves to a rancher to buy more cattle. By how much have these rounds of lending increased the money supply in Islandia?

Instructions: Round your answer to 2 decimal places.

taupecoyote41

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement	Simple Money Multiplier	Money Supply
(Percent)	Simple Money Multiplier	(Dollars)
20
10

A higher reserve requirement is associated with a money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control whether and to what extent banks hold excess reserves.

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ECON 0110 Lecture Notes - Bank Failure, Savings And Loan Association, Federal Deposit Insurance Corporation

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