Explain how a regulation requiring banks to keep a given percentage of deposits in an account paying below market interest rates at the Fed is really a tax on banks.
What will be an ideal response?
Perhaps the best way to explain this is with an example. We will assume, for simplicity that all banks pay a nominal interest rate to depositors of 5% and charge all borrowers 10%. At first it appears that the banks' cost of acquiring funds is 5% and their spread is also 5%. Now, if the Fed installs a 10% required reserve rate with reserves kept either in currency in the banks or on deposit at the Fed in an account paying 4-1/2%, for every one dollar deposited the banks can only lend 90 cents. For example, a $100 deposit requires a $5 annual interest payment to the depositors and receives $0.45 interest on the $10 in reserve deposits. The banks, however, can only lend $90 of the deposit so in effect is paying $4.55 to obtain $90 of loanable funds, or an effective cost of funds of 5.06%, not the 5%. As a result, the banks' profits are reduced or in effect a tax has been placed on the bank.
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If the demand for a product decreases and the supply of the product does not change, equilibrium price and equilibrium quantity will both increase
Indicate whether the statement is true or false
Which of the following is not an example of a fungible good?
A. Cars B. Wheat C. Gold D. All of these are fungible commodities.
The reason for the merger of two businesses that sell unrelated goods but can share business practices and sales forces might best be explained by:
A. economies of scale. B. economies of scope. C. learning by doing. D. indivisible costs.
Product variety is likely to be greater in:
A. monopolistic competition than in pure competition. B. pure competition than in monopolistic competition. C. homogeneous oligopoly than in monopolistic competition. D. homogeneous oligopoly than in differentiated oligopoly.