Function of Banks
- A bank is a financial intermediary- uses liquid assets to finance the investments of borrowers.
- Fractional Reserve Banking- depository institutions hold liquid assets less than the amount of deposits; can take the form of currency in bank vaults or bank reserves deposits held at the Federal Reserve
- T-Account (Balance Sheet)- statements of assets and liabilities
- Asset (Amounts owned)- items to which a bank holds legal claim; the use of funds by fiancial intemediares
- Liabilities(Amounts owed)- the legal claims against a bank; the source of funds for financial intermediaries
Function of the FED
- issues paper currency
- sets reserve requirements and holds reserves of the bank
- lends money to bank and charges interest
- check clearing service for banks
- acts as a personal bank for government
- supervises member banks
- controls money supply
Reserve Requirement
- FED requires bank to always have some money readily available to meet consumers' demand for cash, this amount is set by the FED is the required reserve ratio
- the required reserve ratio is the percentage of demand deposits that must not be loaned out
- required reserve ratio usually = 10%
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