Question

9. What is a bank, exactly? What does a bank do, exactly? 10. “A bank is just like any other corporation doing business in America—like Ford, or Target”… WHY IS THIS STATEMENT UNTURE??? WHAT IS SO SPECIAL ABOUT BANKS????? 11. What is the definition of the term “the REAL rate of interest” or “the REAL interest rate”? 12. What are three of the terrible harms caused by ten percent annual (yearly) inflation rates? Which groups in our economy are hardest hit by 10% inflation? Why?

Answer 1

9. What is bank and functions or duties of bank

A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services such currency exchange,wealth management and safe deposit boxes. There are several different kinds banks including central banks,retail banks, commercial banks, investment banks,co-operative banks and private banks. In most conutries, banks are regulated by the national government or central bank. Banks are a very important part of the economy becouse they provide vital services for both consumers and businesses. As financial services provides, they give a safe place to store individual cash.

FUNCTIONS

Banking basically have two main function : Primar and Secondary

1) Primary function

Accepting deposits and lending money or loan

Banks help in helping bridging the gap between the surplus and the deficit sector, that is, the people who have money more than what they require and people with less than what they require. Bank accepts deposits from the surplus sector and use the same money to render loan services to the deficit sector.

2) Secondary function

Secondary functions of bank include Agency function and General utility functions. A bank acts as an agent to its customers for various services like ; collecting bills, draft, cheques etc. Acting as an excutor, administrator,or trustee of the estate of a customer. Also preparing income tax returns, claming tax refunds.

FOR EXAMPLE : The Federal Reserve System (FRS) is the central bank of the United States and arguably the most powerful financial institution in the world. It was founded to provide the country with a safe, flexible, and stable monetary and financial system. The FRS is comprised of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S. The system is often known simply as “the Fed." The Fed's main duties include conducting national monetary policy, supervising and regulating banks, maintaining financial stability, and providing banking services.

10) “A bank is just like any other corporation doing business in America—like Ford, or Target”. WHY IS THIS STATEMENT UNTURE? WHAT IS SO SPECIAL ABOUT BANKS?

Core or primary bjectives of Banks different from core objective of business organisations or companies.

Primary objective of business

Every business aims to earn moreand more profits out of its working. Primary objectives are related to the comapny and not to individual or society.Earning of profits out of providing goods and services to the customers is the primary objectives of a company.

Primary objectives of banks

Core and primary objectives of banks is to maximize the wealth of its shareholders by offering a wide variety of financial goods and services to its customers. Other primary goals are:

• Keep money safe for customers
• Offer customers interest on deposits, helping to protect against money losing value aganist inflation.
• Lending money to customers, firms and homebuyers.
• Offering financial advise and related financial services, such as insurance, credit card, mutual fund.

Speciality of bank is help each of customers individually.It includes; Stability in the financial system, Price stability - fighting inflation, Full employment, Economic growth, Interest rate stability, Currency stability

For example : The US Federal Reserve announced on April 30th it is expanding the scope and eligibility for the Main Street Lending Program, to help small and medium-sized businesses hit by the Covid-19 crisis access affordable credit. The changes include: creating a third loan option, with increased risk sharing by lenders for borrowers with greater leverage; lowering the minimum loan size for certain loans to $500,000; and expanding the pool of businesses eligible to borrow.

• Promoting Consumer Protection and Community Development

The Federal Reserve advances supervision, community reinvestment, and research to increase understanding of the impacts of financial services policies and practices on consumers and communities.

• Promoting Financial System Stability

The Federal Reserve monitors financial system risks and engages at home and abroad to help ensure the system supports a healthy economy for U.S. households, communities, and businesses.

• Conducting Monetary Policy

The Federal Open Market Committee sets U.S. monetary policy in accordance with its mandate from Congress: to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.

• Supervising and Regulating Financial Institutions and Activities

The Federal Reserve promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole.

• . Fostering Payment and Settlement System Safety and Efficiency

The Federal Reserve works to promote a safe, efficient, and acessible system for U.S. dollar transactions.

11) REAL INTEREST

A real interest rate is an interest rate that has been adjusted to remove the effect of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate reflects the rate of time-perfences for cuurent goods over future goods.The Fisher equation, the real interst rate of an investment calculated as the difference between the nominal interset minus the inflation rate.

• The real interest rate adjusts the observed market interest rate for the effects of inflation.
• The real interest rate reflect the purchasing power of the interest paid on an investment or loan and represents the rate of time perference of the borrower and lender.
• Inflation rate are not constant, prospective real interest rates must rely on estimates of expected future inflation over the time to maturirty of a loan or investment.

For example:On April 29th, the Fed left the target range for its federal funds rate unchanged at 0-0.25 percent and reiterated it is committed to using its full range of tools to support the economy hit by the coronavirus crisis. Policymakers said that the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

12) What are three of the terrible harms caused by ten percent annual (yearly) inflation rates?

INFLATION

Infaltion is a quantitaive measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods.In simple words,inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

• Infaltion is classified into three type; Demand - pull inflation. Cost -push infaltion and Built-In - infaltion.
• Most commonly used indexes are the consumer price index (CPI) and wholesale price index (WPI).
• Inflation can be viewed positively and negatively on the individual viewpont and change of rate.
• People holding cash may nit like inflation, as it erodes the value of their cash holdings.
• Ideally , an optimum level of inflation ie required to promote spending to a certain extend instead of saving, therby nurturing economic growth.

Cause of inflation

Rising prices are the root of inflation, though this can be attributed to different factors. As prices rise, a single unit of currency loses value as it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth.

To combat this, a country's appropriate monetary authority, like the central bank, then takes the necessary measures to keep inflation within permissible limits and keep the economy running smoothly.

Which groups in our economy are hardest hit by 10% inflation? Why

Infaltion is hardest to poor people.Becouse, the prices have more quickly for many of the that low income household spend a lot of their money on , such as rent and utilities. As a result these households- families earning less than $20000- are experiencing a higher rate of inflation than the public at large even as their wages have stagnated,

But everyone experiences a slightly different rate of inflation for the simple reason that we all spend money on different things. The price of cigarettes matters primarily to smokers; the price of diapers affects mostly parents of young children; and the price of gas is a much bigger deal to someone with an 80-mile daily commute than to someone who only takes the car out for weekend excursions.The rich and poor have experienced faster inflation than those in the middle, but for different reasons..

Thank you...