Which of the following statements about depository institutions is false?
A)They borrow at lower interest rates and lend at higher rates.
B)They keep reserves to meet cash withdrawals.
C)They create liquidity by borrowing long and lending short.
D)They pool, and therefore reduce, risk.
E)A credit union is an example of a depository institution.

Question

Quizplus · Accepted Answer

Depository institutions create liquidity by borrowing short and lending long, not the other way around. This is because short-term interest rates are generally lower than long-term interest rates, so borrowing short-term allows them to pay lower interest rates on their liabilities while lending long-term allows them to earn higher interest rates on their assets.

Which of the Following Statements About Depository Institutions Is False