Banks pursue two conflicting goals. Explain what they are and why the conflict.
What will be an ideal response?
The one goal is profit and the other goal is safety or liquidity. Banks seek to make profits and to do so they need to make loans to customers and buy securities. Banks also seek safety and the way that they do so is with liquidity. Liquid assets such as cash and excess reserves are the safe assets of a bank. If, on the one hand, a bank is too cautious and makes few loans, it will make few profits. If, on the other hand, a bank is too lax, it can make many loans, a number of which may go bad, thus hurting bank assets and profits. Banks must seek a balance between profits and liquidity.
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Answer the following statement true (T) or false (F)
1) People who engage in mental accounting are more likely to purchase overpriced warranties. 2) According to behavioral economists, people tend to put too much weight on the future when they make decisions. 3) Time inconsistency refers to the phenomenon where your present self misjudges what your future self will do. 4) Time inconsistency refers to the persistent underestimation of how long a task will take to perform.
Which question is an illustration of a microeconomic question?
A. Is the purchasing power of the dollar higher or lower today than it was in 2008? B. Does government spending influence interest rates in the economy? C. Is the volume of wine produced in 1 year dependent on the price of wine? D. Does a government deficit reduce national economic growth?