Fractional Reserve Banking help?

Discussion in 'Economics' started by judemartin99, Mar 20, 2013.

  1. The federal reserve (the fed) sets the reserve requirement, which banks must meet through deposits at the fed and cash held at the bank. what do these requirements achieve? check all that apply.

    a. they ensure that banks cannot hoard money by holding too many reserves.

    b. they help to prevent runs by reassuring the public that banks will not make too many loans and run out of cash.

    c.they help to faciltate transfers of funds between banks when a customer from one bank writes a check to a customer of another.

    d. they mean that a bank must have one dollar of deposits for every dollar it loans.

    I personally think it's b and c

    Any thoughts guys?
  2. I agree with the "prevent bank run" choice. Banks need to honor withdrawal demands at any time and they take the gamble that no more than 10% of depositors will do this at any given time.

    The "interbank lending" system gives them a way to keep this level intact despite day to day fluctuations, and FED, the "lender of last resort" (printer of money) ensures that there will always be enough.

    Banks are technically insolvent without the FED standing ready to inject at any time....

    The business model: make long term loans from short term deposits and collect the spread. What could possibly go wrong?

  3. To a bank, your deposit is your asset and their liability, because they have to pay it out to you on demand. A bank loan is a liability to you and an asset to a bank, because they get interest in addition to the principal paid back to them. Therefore, to a bank, debt is money. A bank wants the reserve low, so they can lend out more money, and thus make more money.

    I know this is a simplified answer, but basically correct. Read "The Creature from Jeckyll Island", for an explanation of the role of the Fed and fractional reserve banking.
  4. The answer is C. It terms of bank runs and liquidity that would more likely be capital ratio/reserves. Reserve requirements were set up to do the end of day sum transactions between banks. That was the primary use of the central bank. The answer is C.
  5. Is this Martinghoul?