Banks may borrow from or lend to another bank in the Australian Cash Market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the lending bank and a(n) ________ for the borrowing bank. A. asset; liability B. liability; asset C. asset; asset D. liability; liability
Question
Banks may borrow from or lend to another bank in the Australian Cash Market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the lending bank and a(n) ________ for the borrowing bank. A. asset; liability B. liability; asset C. asset; asset D. liability; liability
Solution
The correct answer is A. asset; liability.
Here's why:
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When a bank lends money, it essentially gives out some of its reserves to another bank. This loan is considered an asset for the lending bank because it is expected to be paid back with interest. This is how the bank makes money.
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On the other hand, the borrowing bank now has a debt that it must pay back. This debt is considered a liability because it is an obligation that the bank must fulfill.
So, a loan of excess reserves from one bank to another bank is recorded as an asset for the lending bank and a liability for the borrowing bank.
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