Question

Problem 1: Commercial Banks (5pts) 1a. (1pt) We can think of commercial banks as trading bonds in the economy. When a household puts their savings in a commercial bank, does the commercial bank sell bonds to the household or buy bonds from the household? 1b. (1pt) We can think of commercial banks as trading bonds in the economy. When a firm takes a loan from a commercial bank, does the commercial bank sell bonds to the firm or buy bonds from the firm? 1c. (1pt) Use words to explain why financial intermediaries such as commercial banks are important to a country's GDP. Hint: think about what would happen to consumption and investment if commercial banks disappeared. 1d. (1pt) Suppose the reserve ratio is 0.1 in the U.S., and households demand a 1 trillion dollar amount of checkable deposits. What is the reserve demand from commercial banks? 1e. (1pt) In the U.S., if the currency demand by households is 3 trillion dollars. Households want to hold 70% of their money in checkable deposits and 30% of their money demand in currency. What are the checkable deposits demand by the households?

Answer 1

Commercial Banks :

commercial banks are the most important component of the World Banking System. A commerical bank is a profit based financial institutions that grants, loans, accepts deposit and offer other financial servies such as overdraft facilities and electronic transfer of funds. Household puts their savings in to commerical bank. It play a vital role in financial system and the Economy. These financial services help to make the overall economy more efficient.

Are commerical bank sells bond to the firm :

A bond function as a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. When companies need to raise money, issuing bonds is one way to do it.

Bonds are issued by companies, municipalities ,states and sovereign governments to finance projects and operation. Owner of bonds are debtholders or creditors of the issuer. This means that at some point, the bond issue has to play back the money to the investor. Bonds have a face value (usually what it is hold for initially) firm however they also have a market value which fluctuate a way of measuring the return of investor are getting on a bond is known as the yield.

Commercial Banks make money by providing loans and earning interst income from those loans.