4.3 Banking and the Expansion of the Money Supply

• What are the three main functions of banking?

  Deposits, loans, payments
• The central bank is responsible for regulating the money supply
• Order the flow of funds in the banking system from savers to borrowers:

  1️⃣ Savers deposit funds into commercial banks

  2️⃣ Commercial banks lend funds to borrowers
• Specialized banks like credit unions operate alongside the commercial banking system.


  True
• In full reserve banking, banks hold 100% of their deposits as reserves.

  True
• In full reserve banking, the money multiplier effect is not possible.


  True
• Arrange the following types of banks in a hierarchical structure from top to bottom:

  1️⃣ Central Bank

  2️⃣ Commercial Banks

  3️⃣ Other Banks
• In fractional reserve banking, banks hold only a fraction of their total deposits as reserves
• The money multiplier effect occurs due to fractional reserve banking
• The reserve requirement is set by the central bank
• A lower discount rate encourages banks to borrow more from the central bank.


  True
• What is the role of the discount rate in monetary policy?

  To influence bank lending
• Banks receive and hold deposits from individuals and businesses.

  True
• What role do commercial banks play in the banking system?

  Accept deposits, make loans
• What are the three main responsibilities of the central bank?

  Monetary policy, regulation, oversight
• What is fractional reserve banking?

  Holding a fraction of deposits
• What is the money multiplier effect?

  Expanding money supply
• What are the three main functions of banking?

  Accepting deposits, making loans, providing payment services
• Match the banking function with its description:

  Accepting Deposits ↔️ Receive and hold deposits

  Making Loans ↔️ Provide loans for various purposes

  Payment Services ↔️ Facilitate transactions electronically
• What are the responsibilities of the central bank?

  Monetary policy, regulating money supply, overseeing banking system
• What is the key difference between fractional reserve and full reserve banking regarding reserves held?

  Fractional reserve: fraction of deposits; Full reserve: 100% of deposits
• The banking system has a hierarchical structure with the central bank at the top.


  True
• How does fractional reserve banking contribute to the money multiplier effect?

  Banks lend out excess reserves
• Commercial banks provide payment services
• When the central bank buys government securities, it injects money into the banking system
• A lower reserve requirement allows banks to lend out a larger portion of their deposits
• A lower reserve requirement leads to a greater expansion of the money supply
• Banks act as intermediaries in financial transactions, channeling funds from savers to borrowers
• Fractional reserve banking allows banks to expand the money supply beyond initial deposits.

  True
• A lower reserve requirement allows banks to lend out a larger portion of their deposits.


  True
• The money multiplier effect is not possible in full reserve banking.


  True
• What are open market operations used for?

  To influence the money supply