Question

How are the insurance premiums determined for deposit insurance? Use letters in alphabetical order to select options A The insurance premium is based on the bank’s level of riskiness and then adjusted according to the level of deposits of the overall U.S. banking system. B The insurance premium is based on the bank’s level of deposits and then adjusted according to the riskiness of the overall U.S. banking system's financial situation. C The insurance premium is based on the bank’s level of deposits and then adjusted according to the riskiness of a bank’s financial situation. D The insurance premium is based on the bank’s level of riskiness and then adjusted according to the bank’s level of deposits.

Fill in the blank with the correct answer by typing in the box. If banks are required to hold a greater amount in reserves, they have ______ money available to lend out.

When many banks are choosing to hold excess reserves, expansionary monetary policy may not work well. Use letters in alphabetical order to select options A true B false

Answer 1

1) Option C
The insurance premium is based on the bank’s level of deposits and then adjusted according to the riskiness of a bank’s financial situation.

FDIC insures the deposits in the US banks with a limit of $250000 per depositor per bank. This has been introduced to protects the account holders in the case of run-off on the bank. The bank has to pay a premium for this insurance to the FDIC and that was used to be flat for each participating bank. However, given the varying level of deposits and risk each bank possess, it has been changed. Now, the premium is decided according to the level of deposits the bank hold and the riskiness of the bank's financial situation.

2) If banks are required to hold a greater amount in reserves, they have less money available to lend out.

The banks hold deposits and undertake lending operations through those deposits. However, the central bank in each country obligates that a certain fraction of all the deposits should be kept in the reserve. It means the bank can not use those reserves to lend. Obviously, a lower reserve requirement means the bank can lend out more money while a higher reserve ratio means the bank has fewer funds to lend.

3) A - True

The bank undertakes lending operations by means of deposits it holds. Further, lending through lowering reserve creates a multiplier effect in the economy and actual money supply increases more than what is thought to be.
Expansionary policy is the monetary policy where the money supply is increased in the economy to stoke the consumption in the economy. However, if banks choose to hold excess reserve rather than lend it out then it would hamper the intention of expansionary policy and would not yield desired results.