What are the economic functions of depository institutions? ...

[tichca]

What are the economic functions of depository institutions?
 
  What will be an ideal response?

Question 2

The big tradeoff is a tradeoff between
 
  A) efficiency and fairness.
  B) consumer surplus and producer surplus.
  C) taxes and subsidies.
  D) price ceilings and price floors.

[gabrielle_lawrence]

Answer to Question 1

Depository institutions provide four economic services. First, they create liquidity, that is, bank deposits are highly liquid so that they are easily convertible into money. Second, they minimize cost of obtaining funds because borrowing from one bank is cheaper than borrowing from a variety of lenders. Third, they minimize cost of monitoring borrowers because depository institutions specialize in monitoring borrowers. Fourth, they pool risk by making loans to many borrowers.

Answer to Question 2

A