Question

How the Flow of Funds Affects Bank Performance

In recent years, Carson Company has requested the services listed below from Blazo Financial, a financial conglomerate. These transactions have created a flow of funds between Carson Company and Blazo.

a. Classify each service according to how Blazo benefits from the service.

■Advising on possible targets that Carson may acquire

■Futures contract transactions

■Options contract transactions

■Interest rate derivative transactions

■Loans

■Line of credit

■Purchase of short-term CDs

■Checking account

b. Explain why Blazo’s performance from providing these services to Carson Company and other firms will decline if economic growth is reduced.

c. Given the potential impact of slow economic growth on a bank’s performance, do you think that commercial banks would prefer that the Fed use a restrictive monetary policy or an expansionary monetary policy?