Functions of the Banking System

The video explains the dual functions of the banking system: as a payment system and as a reserve system. It describes the two-tier system where individuals transact through banks, which in turn settle through the central bank. The central bank provides reserves to banks, affecting lending through interest rates rather than controlling reserve quantities. The video also covers how banks manage loans and balance sheets, emphasizing the importance of the central bank's role in providing necessary reserves.

What are the two main functions of the banking system?

• Payment system and loan approval

• Payment system and settlement system

• Customer service and settlement system

• Loan approval and customer service

How do banks settle transactions between each other?

• By sending checks

• By using cryptocurrency

• By marking down and up deposits

• By exchanging physical cash

Who has direct access to the central bank?

• All citizens

• All businesses

• Only banks and certain institutions

• Only government officials

What happens when a bank gives a loan?

• It borrows money from another bank

• It reduces its own reserves

• It transfers existing money to the borrower

• It creates a new deposit in the borrower's account

What must banks ensure when customers want to withdraw large amounts of cash?

• They have enough foreign currency

• They have enough gold reserves

• They have enough digital currency

• They have enough physical cash on hand

What analogy is used to describe the bank's ability to create IOUs?

• A bookie writing IOUs in a book

• A magician creating illusions

• A teacher grading papers

• A chef creating recipes

How does the central bank influence lending?

• By limiting the number of loans

• By controlling the interest rate

• By increasing the money supply

• By setting a fixed amount of reserves

What is the role of the central bank in providing reserves?

• It provides reserves to international banks only

• It provides reserves based on the bank's request

• It provides reserves only during financial crises

• It provides reserves to all citizens

What is the relationship between the central bank and the interest rate?

• The central bank sets a target interest rate for reserves

• The central bank ignores interest rates

• The central bank only adjusts interest rates annually

• The central bank sets a fixed interest rate for all loans

What is the central bank's approach to lending reserves?

• Demand constrained

• Quantity constrained

• Time constrained

• Price constrained