11.7 Essay: The Banking System
1) What are the institutions that make up the nation’s banking system?
Answer: Part of the nation’s banking system is the Federal Reserve System. The other part consists of the banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments. There are three general types of financial institutions: commercial banks, thrift institutions, and money market funds.
Topic: Monetary institutions
Skill: Level 1: Definition
Section: Checkpoint 11.2
Status: AA
2) What are the three types of financial institutions that accept deposits that are part of the U.S. money supply? Briefly describe each of the three types of financial institutions.
Answer: The three institutions are commercial banks, thrift institutions, and money market funds. Commercial banks are financial firms that accept deposits and make loans. There are about 8,600 commercial banks in the United States. Thrift institutions include savings and loan associations, savings banks, and credit unions. These firms also accept deposits and make loans. The last type of financial institution is money market funds. Money market funds obtain funds by selling shares and using the proceeds to buy assets such as U.S. Treasury bills.
Topic: Monetary institutions
Skill: Level 1: Definition
Section: Checkpoint 11.2
Status: WM
3) Explain what is meant by the phrase a bank’s “balancing act.”
Answer: Banks accept deposits and make loans with the funds they receive from the deposits. Banks profit if the interest rate they charge on their loans exceeds the interest rate they pay on their deposits. Loans are made for a specified length of time and cannot be called in before they are due. However, deposits can be withdrawn at any time by the depositors. Therefore a bank must perform a balancing act: It is risky to lend too much of the deposits and run the risk of mass withdrawals that would create a crisis for the bank. However, it is by making loans that the bank earns a profit.
Topic: Bank profit
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Status: AA
4) “Banks make a profit by paying depositors a high rate to attract funds and making loans at a low rate to encourage borrowing.” Is the previous statement correct or not?
Answer: The statement is incorrect. Banks make a profit if the interest rate they collect on the loans they make exceeds the interest rate they must pay on the deposits they attract.
Topic: Bank profit
Skill: Level 1: Definition
Section: Checkpoint 11.2
Status: NAU
5) “Banks hold about 50 percent of their assets as reserves.” Is the previous statement correct or not?
Answer: The statement is incorrect. In 2011 banks kept an average of 13 percent of their assets as reserves.
Topic: Banks’ reserves
Skill: Level 2: Using definitions
Section: Checkpoint 11.2
Status: Revised
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