Explain the role of banks with regard to money which they accept from the public.
Generated by claude-sonnet-4-6 · 2026-06-15 06:56 · grounding rag
Model Answer
Banks accept deposits from the public and use them mainly to extend loans to borrowers.
- Banks keep only a small proportion (about 5%) of deposits as cash reserve to meet day-to-day withdrawals by depositors.
- The major portion of deposits is used to provide loans for various economic activities.
- Banks thus mediate between depositors (surplus funds) and borrowers (need funds).
- Banks charge a higher interest rate on loans than they pay on deposits; this difference is their main source of income.
Source: Loan Activities of Banks, Chapter 3 – Money and Credit
---
Explanation
Examiners look for these four specific points: (1) small cash reserve kept (~5%), (2) major portion lent out, (3) role as mediator between depositors and borrowers, and (4) interest rate difference as income. Mentioning the exact 5% figure is a bonus. Don't write vague generalities — use the precise mechanism described in the textbook.