Question

On Friday, Josie receives her paycheck and goes directly to the bank after work to make a deposit into her savings account. The bank keeps the required reserve and then loans out the remaining balance to a qualified borrower named Juan as a portion of his small business loan. Juan uses the loan to buy a new copy machine for his printing business and makes small monthly payments to the bank to payback the principal balance plus interest on the loan. The bank profits from a portion of the interest payment received and also passes some of the interest back to Josie in the form of an interest payment to her savings account. In this example, the bank is acting ________.

Answer 1

In this example, where the bank safeguards Josie's deposits, lends some amount to Juan, and receives interest, and then appropriates some of it to Josie, the bank acts as a financial intermediary.

A financial intermediary facilitates financial transactions by taking deposits from the surplus unit and lending to the deficit sector of the economy.

The bank profits from its financial inter-mediation by charging fees and interests to its customers.

Thus, in this example, the bank is a financial intermediary.

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