Money Creation and Banking System Quiz

Central banks primarily conduct monetary policy to regulate money supply and interest rates in an economy.

The prime rate is the interest rate commercial banks charge their most creditworthy customers, serving as a benchmark for various loans.

FDIC, or Federal Deposit Insurance Corporation, provides deposit insurance to protect bank customers against losses.

Credit risk is the risk that a borrower may not repay a loan, resulting in financial losses for the lender.

FDIC provides deposit insurance to protect customers' deposits in case of bank failures, promoting confidence in the banking system.

'M0' represents the physical currency in circulation as part of the money supply.

The reserve requirement is the percentage of deposits that banks are required to keep as reserves, ensuring liquidity and stability.

The federal funds rate is the interest rate at which banks lend to each other overnight, influencing overall interest rates.

Open Market Operations involve central banks buying and selling government securities to influence money supply and interest rates.

The Federal Reserve in the U.S. regulates banks and financial institutions to maintain stability and protect consumers.

The discount rate is the interest rate at which the central bank lends money to commercial banks during financial crises.

The central bank acts as the 'lender of last resort,' providing liquidity to financial institutions during crises to prevent systemic failures.

Liquidity in banking refers to the ease with which assets can be converted into cash, ensuring financial stability.

Fractional reserve banking is the process where banks create money by lending more than their reserves, expanding the money supply.

Leverage in banking refers to using borrowed funds to amplify potential returns on investments, though it also increases risks.

Central banks control the money supply by buying and selling government securities through open market operations.

Open market operations are the primary tool used by central banks to control both the money supply and interest rates.

Net interest margin is the difference between a bank's interest income and interest expenses, indicating profitability.

Basel III aims to strengthen bank capital requirements, ensuring financial institutions have sufficient capital to withstand economic shocks.

Open market operations involve the central bank buying or selling government securities to influence the money supply and interest rates.