How bank act as a Medium of Exchange?
Banks act as a medium of exchange by taking cash from the person who has a surplus of it and giving loans to those who are in need of it. Only 15% of the bank’s total cash deposits are kept by a bank to meet their daily withdrawal requests. Banks use their remaining money to give loans to people who are in need of it at a specific interest rate.
Example:
X wants to buy a car for ₹ 25,00,000. But he doesn’t have enough money right now. So he went to a bank for a loan and the bank provided the loan at a specific interest rate of 7%. He buys the car with the help of a bank loan.
“Banks are efficient medium of exchange.” Explain
By opening a bank account, people deposit their money in banks. Banks provide fixed interest (usually around 5%) on the deposited amount and help people to keep their money safe. People can withdraw their money whenever they want. They can transfer money from one bank account to another with the help of cheques, demand drafts and Internet banking. Nowadays, UPI apps are widely used methods of online payment services.
Banks are an important part of our daily lives. Banks are financial institutions that provide services like accepting deposits, withdrawing money and providing loans. One of the main functions of banks is to act as a medium of exchange. Only 15% of their total cash deposits are kept by a bank to meet their daily withdrawal requests. They use their remaining money to provide loans to the people at a predetermined rate of interest.
Table of Content
- Barter system
- Money
- Money as a Medium of Exchange
- Functions of Bank
- Types of Commercial Banks
- How bank act as a Medium of Exchange?
- Why Banks are an Effective Medium of Exchange?