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BUREAUCRACY: A system or rules and procedures designed to operate a complex organization. While most people look to government when the term bureaucracy arises (and make no mistake, government is not shy when it comes to complex bureaucracies), bureaucracies exist in all types of organizations -- private, public, government, business, charities, corporations, even households. The problem economists have with bureaucracies is that rigid, administrative rules often drive a wedge between action and responsibility. The clerk at the welfare counter is only following rules established by Congress. The clerk has no authority to change the rules, and Congress seldom if ever sees the consequences of their rules.

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Lesson 18: Banking | Unit 3: Reserve Banking Page: 11 of 24

Topic: Reserves <=PAGE BACK | PAGE NEXT=>

Banks divide assets between loan and reserves using fractional-reserve banking:
  • The profit-pursuing, financial intermediary function of banks dictates that deposits be used for loans.
  • The safekeeping, money supply security function dictates that banks keep reserves.

A) 100% reserve banking would imply that:

  • They could not be financial intermediaries, but only storage buildings. The financial intermediary function performed by banks would have to be performed by something else.

B) 0% reserve banking would imply:

  • Problems with customers who want their wealth, but can't get it because the bank loaned it out.
  • The bank can easily be put out of business when customers spread the word that the bank is out of funds.

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DIAMOND-WATER PARADOX

The apparently conflicting and perplexing observation that water, which is more useful than diamonds, has a lower price than diamonds. This paradox was proposed by economists in the 1800s as a means understanding the role utility plays in the demand price of a good by differentiating between total utility and marginal utility.

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Today, you are likely to spend a great deal of time surfing the Internet hoping to buy either a wall poster commemorating the first day of spring or a lazy Susan for you dining room table. Be on the lookout for high interest rates.
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The first paper notes printed in the United States were in denominations of 1 cent, 5 cents, 25 cents, and 50 cents.
"Good humor is a tonic for mind and body. It is the best antidote for anxiety and depression. It is a business asset. It attracts and keeps friends. It lightens human burdens. It is the direct route to serenity and contentment."

-- Grenville Kleiser, Author

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