When a check is drawn against bank A and deposited in another bank, the first bank loses reserves as the check is cleared. Yet the check collection involves no loss of reserves by the banking system. Explain what significance this has for the lending ability of the system as a whole.
What will be an ideal response?
The system does not lose reserves as long as checks are being redeposit in other banks. The reserves simply move from one bank to another within the system. This means that the reserves are still available within the system to support loans and since reserves must be only a fraction of checkable deposits, they can support a multiple of the reserve amount in terms of loan and deposit values. Reserves are sometimes called high-powered for that reason.
You might also like to view...
Profits and losses play an important role in helping
a. to signal to government which businesses are suffering losses so that they can be subsidized. b. consumers decide which products they value the most by looking at each firm's profit. c. direct businesses toward productive projects and away from ones that are unproductive. d. ensure that the total profits in the economy exactly equal the total losses.
The simple circular flow diagram is a ______.
a. spreadsheet of government expenditures b. road map to successful employment c. visual model of the economy d. reference of stock market fluctuations
The notion of interest sensitive consumption would be most readily observed when people buy
A. food. B. cars. C. insurance. D. higher education.
An example of a nonrenewable resource is
a. labor b. capital c. entrepreneurship d. iron ore e. automobiles