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S5 Economics: Money and Banking Paper 3 (bank functions, reserves and the central bank)
S5 Economics: Money and Banking Paper 3 (bank functions, reserves and the central bank)
Paper 3 focuses on banks themselves: their three functions, reserves and lendable funds under fractional reserve banking, reverse use of the deposit multiplier, and the central bank as note issuer, regulator and lender of last resort. Conceptual items on runs and systemic risk need a cause and effect chain, not just a label. All values are machine-checked.
Quick answer The three functions are taking deposits, lending and payments; a 20 percent ratio on 10,000 dollars keeps 2,000 in reserve and leaves 8,000 to lend; a multiplier of 2.5 means a 40 percent ratio; M2 includes savings and time deposits; a nominal 5 percent against 1.5 percent inflation gives a real 3.5 percent; fractional reserves expose banks to runs; the central bank issues notes, regulates and acts as lender of last resort; 4,000 dollars at 12.5 percent keeps 500 in reserve; total deposits of 30,000 dollars at 20 percent need 6,000 in reserves.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 questions |
| Suggested time | 25 minutes |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: Money and Banking |
| Level | S5 |
02 Questions (10 items)
- FoundationWhat are the three main functions of a bank?
- FoundationThe reserve ratio is 20 percent and a customer deposits 10,000 dollars. What are the reserves and the lendable amount?
- FoundationThe deposit multiplier is 2.5. What is the reserve ratio?
- FoundationWhich of the following belongs to M2 but not to M1?
- IntermediateThe nominal rate is 5 percent and inflation 1.5 percent. What is the real rate?
- IntermediateUnder fractional reserve banking, why may a bank face a run?
- IntermediateWhat are three main functions of a central bank?
- ChallengeA customer deposits 4,000 dollars and the reserve ratio is 12.5 percent. What are the reserves and the lendable amount?
- ChallengeTotal deposits in the system reach 30,000 dollars and the reserve ratio is 20 percent. What are total reserves?
- Error redoSomeone claims a bank can lend out every dollar deposited to earn the most interest. What is wrong?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | Taking deposits, lending to borrowers, and providing payment and transfer services. | Deposits supply funds, loans earn interest, and payment services make transactions convenient. |
| 2 | Reserves of 2,000 dollars and 8,000 dollars to lend. | 10,000 times 0.2 gives 2,000, leaving 8,000 dollars to lend. |
| 3 | 40 percent. | The reserve ratio is 1 divided by the multiplier, that is 1 over 2.5. |
| 4 | Time deposits. | M1 covers cash and current deposits only, while savings and time deposits count in M2. |
| 5 | 3.5 percent. | The real rate is the nominal rate minus inflation, that is 5 minus 1.5 percent. |
| 6 | Because cash reserves are less than total deposits, so if depositors withdraw at once the bank cannot pay immediately. | Lent funds have become borrowers assets and cannot all be recalled at short notice. |
| 7 | Issuing banknotes, supervising the banking system, and acting as lender of last resort. | A central bank does not aim at profit but at stability of the money and banking system. |
| 8 | Reserves of 500 dollars and 3,500 dollars to lend. | 4,000 times 0.125 gives 500, leaving 3,500 dollars to lend. |
| 9 | 6,000 dollars. | Reserves equal total deposits times the reserve ratio, that is 30,000 times 0.2. |
| 10 | It ignores reserve requirements and withdrawal needs; lending everything leaves nothing to pay depositors, so a run would bring the bank down. | A bank must hold part of its deposits as cash reserves and lend only the remainder. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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