How do banks create liquidity?
What will be an ideal response?
Banks create liquidity because they accept short-term deposits and make long-term loans. The short-term deposits can be quickly and easily changed into money—indeed, some of the deposits are money itself! In exchange, the bank makes long-term loans that cannot be converted to money until their due date is reached.
You might also like to view...
Suppose consumers view the George Foreman Grill and the Weber charcoal grill as close substitutes. Other things constant, a fall in the price of the George Foreman Grill would tend to
A) increase the demand for the Weber grill. B) increase the demand for the George Foreman Grill. C) decrease the demand for the Weber grill. D) decrease the demand for the George Foreman Grill.
If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
a. It will give the bank new reserves. b. It will write the bank a check. c. It will transfer cash to the bank's vault. d. It will take reserves from another bank.