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Question
How do banks mediate between those who have surplus money and those who need money?
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Solution
A bank mediates between those who have surplus money and those who need money by allowing both to open accounts with it. Banks only keep about 15% of cash reserves to provide to people who come to withdraw money on a daily basis. Those with surplus money are encouraged to invest with the bank and are paid a certain rate of interest for the same. Those who need loans are required to pay interest on their loans. The difference between payments to lenders and receipts from borrowers comprises the bank’s earnings. Thus, the bank acts as a beneficiary for those with surplus money as well as those who need money.
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