Institutions that accept deposits from individuals and organizations, against which depositors can write checks on demand for their market transactions and that use these deposits to make loans are called:
A) depository institutions.
B) financial market institutions.
C) insurance companies.
D) none of the above.
The correct answer and explanation is :
The correct answer is A) depository institutions.
Explanation:
Depository institutions are financial organizations that accept deposits from individuals and organizations and allow depositors to access their funds through withdrawals or checks on demand. These institutions include commercial banks, savings and loan associations, and credit unions. The primary role of depository institutions is to provide a safe place for individuals and organizations to store their money, offer a means for people to manage their finances, and facilitate payments through the writing of checks or other withdrawal methods.
These institutions are also crucial for the overall economy because they use the deposits they hold to make loans to businesses and individuals. When individuals deposit money into their accounts, the bank can lend out a portion of that money to borrowers, earning interest. The interest collected from loans is one way banks generate revenue. In turn, borrowers use these funds for various purposes, such as purchasing homes, starting businesses, or expanding operations, which helps stimulate economic activity.
Depository institutions must maintain a certain level of reserves, as required by regulators, to ensure they can meet withdrawal demands from customers. This process is known as fractional reserve banking. Through this system, only a portion of the deposits are kept in reserve, while the remainder is lent out to borrowers.
These institutions also offer a range of services beyond accepting deposits and making loans, such as savings accounts, investment products, and other financial services.
Other options in the question are not correct because:
- B) financial market institutions refers to organizations involved in the buying and selling of financial assets, not primarily focused on accepting deposits.
- C) insurance companies deal with risk management and protection, not deposit-taking.
- D) none of the above is incorrect since the correct answer is A.