Question

1. Fractional reserve banking is

I. feasible because new deposits typically just about offset new withdrawals

II. requires regulation in order for it to exist

III. an example of financial innovation

I, II, and III

I only

I and III only

I and II only 2. There is typically a spread between interest rates that lenders pay and interest rates that borrowers receive. The spread between the two reflects consumer surplus enjoyed by bank customers the cost of matching borrowers and lenders the economic profits that financial institutions earn in the long run the market power of large financial institutions

Answer 1

Question – 1;

Answer is option (I, II and III)

Explanation;

Fractional reserve banking is feasible because new deposits typically just about offset new withdrawals hence statement I is correct. Fractional reserve banking requires regulation in order for it to exist because without keeping anything in the reserves financial insitutions can not survive thus statement II is also correct. Fractional reserve banking is an example of financial innovation because this is new financial tools for improving banking practices hence statement III is also correct.

Thus answer is option (I, II and III).

Question – 2;

Answer is option (The economic profits that financial institutions earn in the long run).

Explanation;

As we know that every financial institutions require some profits for the survival and such profits is know as the difference between interest rates that lenders pay and interest rates that borrowers receive.

Hence we can say that the spread between the two reflects the economic profits that financial institutions earn in the long run.