Final answer:
Banks serve as intermediaries between savers and borrowers, provide depository accounts, lend out funds, and create money through the lending process, which is amplified by the money multiplier effect. The correct answer is option A.
Step-by-step explanation:
Functions Performed by Banks
Banks perform a variety of functions in the financial system. Transferring money from savers to spenders is a fundamental role, acting as intermediaries between individuals or businesses who have excess funds and those who require capital. This is achieved by providing savings and checking accounts, which are depository accounts, as well as lending services. Moreover, banks are involved in the creation of money through the lending process. When banks lend out a portion of their deposits, the borrowers often deposit the borrowed money back into the banking system, allowing banks to lend out more, thus creating more money. This is referred to as the money multiplier effect.
The process of money creation is based on the reserve ratio, which is the fraction of deposits that banks retain on hand as reserves. Banks are required to keep part of their deposits as reserves to manage withdrawals, but they can lend out the rest. The reserve requirement is the mandated minimum percentage of deposits that banks need to keep in reserve. It's important to note that banks also face the risk of negative net worth if their assets lose value, for example, from a high number of loan defaults or significant changes in interest rates.
The Economic Role of Banks
Banks contribute significantly to the economy by facilitating transactions through various financial services and by allocating savings to productive uses through the loan-making process. They also offer accounts with different terms to meet consumer preferences, considering the risks, monetary costs, and benefits of maintaining these accounts. In these ways, banks play a crucial role in capital formation and the functioning of the economy.