Question

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest income.

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Answer 1

Singleton Bank uses deposits to function as a financial intermediary, loaning out funds and earning interest income, while obeying Federal Reserve reserve requirements. Loans generate interest income for banks, which helps to pay depositors and fund operations.

Step-by-step explanation:

When a bank, such as Singleton Bank, receives deposits, it is required by the Federal Reserve to keep a certain percentage as reserves. The remaining funds can be loaned out to individuals or businesses, like Hank's Auto Supply, which intern generate interest income for the bank.

The scenarios given illustrate the principles of simple interest calculations, reserve requirements, and the multiplier effect of banking. In Example A, determining the monthly payment of a sizable home loan involves understanding amortized loans and the impact of monthly compounding interest rates over a long-term period.