Reading 24: Money, the Price Level, and Inflation LOS c习题精 following, statements, innovation, 2010

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LOS c: Describe the economic functions of and differentiate among the various depository institutions and explain the impact of financial regulation, deregulation, and innovation.

 

 

At a recent staff meeting of Economic Advisers Inc., a think-tank located in Washington, DC, Mitchell Jung made the following statements regarding the main economic functions of depository institutions.

Statement 1: One of the main economic functions of depository institutions is to act as financial intermediaries. By doing so, they lower the borrowers’ cost of funds from what it would otherwise be if borrowers had to seek out individuals willing to lend.

Statement 2: Depository institutions create liquidity by using loans they take in to have funds available to pay interest on short-term deposits.

Are Statement 1 and Statement 2 as made by Jung CORRECT?

Statement 1

Statement 2

A) Incorrect Incorrect

B) Correct Incorrect

C) Correct Correct

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Depository institutions have four main economic functions:

1. they create liquidity by using the short-term deposits they take in to make longer-term loans;
2. by acting as financial intermediaries, depository institutions lower the cost of funds for borrowers from what they would be if they had to seek out individuals willing to lend;
3. depository institutions are in a better position than individuals would be to monitor the risk of the projects for which borrowers are using the loaned funds; and
4. because they each make many loans, depository institutions can reduce risk through diversification of individual loan risks.

 

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Which of the following is the primary income-earning asset of commercial banks?

A) Loans outstanding.

B) Demand deposits.

C) Time deposits.

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Loans are the primary income-earning assets of commercial banks. Deposits are a bank’s liabilities.

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Which of the following is the most accurate with regard to the result of banking deregulation that occurred in the U.S. during the 1980s?

A) The emergence of a great number of small and local banks increased the efficiency of bank operations.

B) There is a clearer distinction between the functions of commercial banks on the one hand and thrift institutions on the other.

C) Different types of depository institutions are now more similar in the products and services that they provide.

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During the 1980s (and 1990s) many of the restrictions that made commercial banks different from savings banks and thrifts were relaxed, allowing the latter to compete more directly with the former, and allowed other institutions to participate in activities which were formerly only permitted to banks and savings institutions. Another area of deregulation was the repeal of earlier laws that restricted banks from opening branches nationwide. Permitting banks to open branch offices in any state has led to the consolidation of banks, the emergence of a few very large national banks, many mergers and acquisitions, and a resulting increase in the efficiency of bank operations.