Reserve requirement , Financial Accounting

2(i). If all depositors tried to convert their deposits into cash at once, they would find that there are not sufficient reserves in the system to permit all of them to do this at the same time. Why then do we not still have panicky runs on the banks? Would it be better for the Bank of Canada and the federal government to impose a 100% reserve requirement? What effect would such a reserve requirement have on the banking system's ability to create deposit money? Would it preclude any possibility of a panic?

 (ii). Explain the practice of "fractional reserves banking" and briefly show how it provides the capacity for banks to create deposit money through debt monetization (i.e., through the process of payments intermediation). Do you think that this is a "good way" to create money? Explain carefully.

 

Posted Date: 2/18/2013 7:42:41 AM | Location : United States







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