Final answer:
Direct check clearing is when two banks have accounts with each other to settle payment items; it's an efficient channel for fund transfers. Banks as financial intermediaries facilitate a flow of deposits to loans and back with interest. Technological changes have blurred the lines between different types of money supply, especially M1 and M2.
Step-by-step explanation:
When two banks have accounts with each other specifically for the purpose of clearing and settlement of payment items, this represents a direct check clearing channel. This interbank relationship simplifies the process of clearing checks, as it allows for the direct transfer of funds between banks without the need for an intermediary. The primary role of banks as financial intermediaries is depicted in Figure 17.3, which shows a cycle of deposits being received, loans being issued, and loan repayments with interest flowing back into the bank, benefitting the original savers. Meanwhile, the description of changes within the monetary supply, particularly between M1 and M2, highlights how savings and checking accounts have become more similar because of technological advancements and evolving banking practices, thereby affecting the overall money supply and the liquidity of assets.