Chapter 2 - Financial Institutions

A banking system is responsible for operating a payment system, providing loans, taking deposits, and helping with investments. This means that it handles the transactions and transfers of funds, lends money to individuals and businesses, accepts deposits from customers, and offers assistance and advice in making investments.

Commercial banks typically charge higher interest rates on loans compared to the interest rates they offer on deposits. This is because loans are considered a riskier investment for the bank, as there is always a possibility that the borrower may default on the loan. To compensate for this risk, banks charge higher interest rates on loans. On the other hand, deposits are considered a safer investment for the bank, as they can use these funds for lending and other activities. Therefore, they offer lower interest rates on deposits to attract customers and incentivize them to keep their money in the bank.

This statement is false. Commercial banks make a profit on the loans they provide, not just on their deposits. When banks provide loans, they charge interest on the borrowed amount, which is how they generate income. Deposits, on the other hand, are liabilities for the bank as they need to pay interest on them to the depositors. Therefore, the correct answer is false.

Central banks use the reserve requirement as a tool to control the money supply in an economy. The reserve requirement refers to the percentage of deposits that banks are required to hold as reserves. By adjusting this requirement, central banks can influence the amount of money that banks can lend out, thereby affecting the overall money supply. Increasing the reserve requirement reduces the amount of money available for lending, while decreasing it increases the money supply. Therefore, the statement that the reserve requirement is one of the basic methods used by central banks to control the money supply is true.

The banking system is a network of institutions that provide financial services such as savings accounts, loans, credit cards, and payment processing. These services help individuals and businesses manage their money, access credit, and facilitate transactions. By offering these financial services, the banking system plays a crucial role in supporting economic activities and promoting financial stability.

The financial institution serves as a safe place for individuals and businesses to store their savings, providing security and protection for their funds. Additionally, they offer advice on financial transactions, guiding customers in making wise investment decisions. They also assist in the settlement of debts, helping individuals and businesses manage their financial obligations effectively. Lastly, financial institutions have the ability to on-lend deposited funds, allowing them to provide loans and other financial services to customers. Therefore, all of the given options are correct explanations of the services provided by financial institutions.

The central bank controls the size of the monetary base. This is true because the monetary base, also known as the high-powered money, consists of currency in circulation and reserves held by commercial banks. The central bank has the authority to issue and withdraw currency and also has the power to influence the level of reserves held by commercial banks through open market operations, reserve requirements, and other tools. By controlling the monetary base, the central bank can effectively manage the money supply and influence economic conditions.

Commercial banks have the ability to create demand deposits through loans and investments, which in turn affects the supply of money in an economy. When banks provide loans, they create new money in the form of demand deposits, which increases the money supply. Additionally, when banks invest in various assets, they also influence the money supply. Therefore, the statement that the ability of commercial banks to maintain and create demand deposits by loans and investment influences the supply of money in a nation's economy is true.

An insurance company is a financial institution that allows people to pool their resources to minimize the risk associated with accidents, sickness, death, and other unpredictable circumstances. By paying premiums, individuals can transfer the financial burden of potential losses to the insurance company, which then provides compensation in the event of covered losses. Insurance companies play a crucial role in providing financial protection and peace of mind to individuals and businesses.

The money multiplier is a concept used in economics to determine the amount of money that can be created from a given amount of reserves. It measures the potential impact of reserves on the money supply. In this case, the statement is true because the money multiplier does indeed show how many dollars' worth of deposits can be created with each additional dollar of reserves.

A credit union is insured by the National Credit Union Share Insurance Fund. This fund provides insurance coverage for deposits in credit unions, similar to how the Federal Deposit Insurance Corporation (FDIC) insures deposits in commercial banks. Therefore, credit unions are protected by this insurance fund, which helps safeguard the deposits of their members.

The former name of the State Bank of Vietnam is the National Bank of Vietnam.

The statement is false because the Federal Reserve (FED) does not directly control the amount of money that households choose to hold as deposits in banks or the amount that banks choose to lend. The FED primarily influences the money supply through its monetary policy tools, such as setting interest rates and conducting open market operations. However, the decision of households to hold deposits and banks to lend is influenced by various factors, including market conditions, consumer demand, and individual financial decisions.

The reserve ratio refers to the percentage of deposits that banks are required to hold as reserves. The statement suggests that the reserve ratio cannot be less than 30%, which is incorrect. In reality, the reserve ratio can be set at any percentage by the central bank to regulate the money supply and control inflation. Therefore, the correct answer is False.

The correct answer is Northern Bank because it is not a type of bank or banking system. Commercial Bank, Central Bank, and Credit Union Bank are all types of banks or banking systems. However, Northern Bank is not commonly recognized as a type of bank or banking system.

The functions of both the World Bank (WB) and the International Monetary Fund (IMF) include assisting war-ravaged nations to overcome the aftermath of wars, assisting developing countries, and creating a stable system of foreign exchange and facilitating trade. These organizations aim to provide financial and technical assistance to countries in need, whether they have been affected by war or are in the process of development. Additionally, they work towards establishing a stable global economic environment by promoting international trade and ensuring the stability of foreign exchange rates. Therefore, the answer "all of the above" is correct as it encompasses all the mentioned functions of both the WB and IMF.

Shinhan Bank Vietnam is classified as a wholly-owned foreign owned bank. This means that the bank is fully owned by a foreign entity, in this case, Shinhan Bank from South Korea. As a foreign-owned bank, Shinhan Bank Vietnam operates in Vietnam but is owned and controlled by a foreign parent company. This type of bank is subject to regulations and restrictions set by the host country's banking authorities.

The statement is false because the money multiplier is actually inversely related to the reserve requirement. When banks hold more reserves, they have less money available to lend out, which decreases the money multiplier. Conversely, when banks hold fewer reserves, they have more money available to lend out, increasing the money multiplier. Therefore, the more banks hold in reserve, the smaller the money multiplier.

The statement "A great deal of the money in circulation is created by the central bank" is false. While the central bank does have the authority to create money, the majority of money in circulation is actually created by commercial banks through the process of lending. When commercial banks make loans, they create new money by crediting the borrower's account with the loan amount. This money then enters circulation and becomes part of the money supply. Therefore, it is incorrect to say that the central bank creates a significant portion of the money in circulation.

Loans from the World Bank are only given to member governments, their agencies, or private firms that have the guarantee of their member government. This means that the World Bank does not directly provide loans to individuals or organizations that do not have the backing of a member government. Therefore, the statement "True" is correct.

The correct answer is England because the symbol shown in the question is the logo of the Bank of England. The Bank of England is the central bank of the United Kingdom and is responsible for issuing and regulating the country's currency, managing monetary policy, and maintaining financial stability. The logo features a combination of a lion and a unicorn, which are symbols associated with British royalty and heritage.

Central banks generally purchase foreign exchange reserves as assets. These reserves are typically held in the form of foreign currencies, such as the US dollar, euro, or yen. These reserves serve as a means for central banks to stabilize their domestic currency, intervene in the foreign exchange market, and maintain liquidity in their economy. Purchasing foreign exchange reserves allows central banks to influence exchange rates and manage monetary policy effectively. Therefore, foreign exchange reserves are the assets most commonly purchased by central banks.

There are 5 wholly-owned foreign owned banks in Vietnam.

A central bank does not directly set interest rates for loans such as mortgages, auto loans, or personal loans to control the money supply. Instead, the central bank indirectly influences interest rates through its monetary policy tools, such as open market operations, reserve requirements, and the discount rate. These tools affect the overall supply of money in the economy, which in turn can impact interest rates set by banks and other financial institutions.

Financial institutions can be broadly categorized based on their ownership structure into two categories: commercial banks and cooperative banks. Commercial banks are privately owned institutions that provide a wide range of financial services to individuals, businesses, and governments. They are profit-oriented and aim to maximize shareholder value. On the other hand, cooperative banks are owned and operated by their customers or members. They are focused on providing financial services to their members and promoting their economic well-being. Cooperative banks prioritize the needs of their members rather than profit maximization.

The statement is false because the International Monetary Fund (IMF) does not provide long-term borrowing for trade. The IMF primarily provides short-term financial assistance to member countries facing balance of payments problems. Its main purpose is to promote global monetary cooperation, stability, and growth, rather than facilitating trade through long-term credit.

The statement that countries with the most independent central banks have the lowest inflation rates is generally true. This is because when a central bank is independent, it can make decisions based on economic factors rather than political pressure. This allows them to focus on maintaining price stability and controlling inflation. Independent central banks are also more credible in their commitment to low inflation, which helps to anchor inflation expectations and further reduce inflation rates. Therefore, countries with independent central banks tend to have lower inflation rates compared to countries with less independent central banks.

The central bank is not responsible for enterprises' interest in the monetary field. The central bank's primary responsibility is to regulate and control the country's money supply, interest rates, and currency. It also acts as a banker to the government and commercial banks, and it is responsible for maintaining financial stability and promoting economic growth. However, the central bank does not directly handle or cater to the interests of individual enterprises in the monetary field.

The Bank for Investment and Development of Vietnam (BIDV) is classified as a state-owned commercial bank. This means that the bank is owned and controlled by the government of Vietnam. State-owned commercial banks are typically established to provide financial services and support economic development initiatives in a country. BIDV, being a state-owned bank, operates under the guidance and regulations set by the government and plays a crucial role in the banking industry in Vietnam.

The purpose of a central bank is to work towards creating a healthy employment environment. This means that the central bank takes measures to promote job growth and reduce unemployment rates. While maintaining healthy levels of inflation and controlling the money supply and interest rates are also important functions of a central bank, the primary focus is on ensuring a strong employment environment.