Question

Explain what banks do and how it affects the overall economy. (10 points)

Answer 1

Answer:

As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities.

Explanation:

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Answer 2

Answer:

Explanation:

In terms of a strict functional explanation, banks are the intermediary for the money supply of an economy. The treasury departments of a country determines the monetary policy for that economy (such as interest rates and capital infusion), and use the central bank (e.g. the Fed or ECB) as the distributor. They then increase or decrease the money supply through their branches (24 in the US) which then pass that off to the commercial banks. The money over time gets distributed throughout the economy (the velocity of money).