When a bank makes a loan to a customer who is not an ADI, A. it...
When a bank makes a loan to a customer who is not an ADI,
| A. |
it destroys private money in the financial system at the time of the loan. |
|
| B. |
it lends central bank money to the borrower. |
|
| C. |
it may lose reserves when the borrower spends the money he/she borrowed. |
|
| D. |
it needs to collect bank deposits from a SSU beforehand. |
Homework Answers
ADIs refers to the assets deposit institutions. ADIs are the institutions authorized by the regulators and commercial banks to accept deposits from the customers. Non-ADI refer to the institutions which are not ADIs.
When a bank makes a loan to a customer who is not an ADI, it increases the risks for the bank to lose the reserve as the customers do not have any deposits from the customers. Thus, the bank may lose reserves when the borrower spends the money that he/she borrowed. There is no backing in terms of deposits for such institutions.
Thus, Option C is the correct answer.
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