MAKING LOANS. Banks receive funds from people who do not need them at the moment and lend them to those who do. For example, a couple may want to buy a house but have only part of the purchase price saved. If one or both of them have a good job and seem likely to repay a loan, a bank may lend them the additional money they need. To make the loan, the bank uses funds other people have deposited. A major obligation of a bank is to permit depositors to withdraw their funds upon demand. But no bank has enough cash readily available to satisfy its depositors if all were to demand their funds at the same time. Banks know from experience, however, that such a demand-called a run-rarely occurs. If people are confident they can withdraw their funds at any time, they will leave them on deposit at the bank until needed. As a result, banks can loan and invest a large percentage of the funds deposited with them. In most countries, the government limits the percentage of a bank's funds that can be used for loans and investment. The government simultaneously sets a minimum percentage that must be kept on reserve for meeting withdrawals.

EXCHANGE RATES is the price of one nation's currency expressed in terms of another country's currency. An American who buys a product from a company in the United Kingdom might have to pay for it in British pounds. The American would exchange dollars for pounds at the current exchange rate. For example, if the rate were $1.25 to the pound, the American would pay $25 for a British sweater that cost 20 pounds. If Americans bought more British products, the demand for pounds would increase and the pound would rise in price against the dollar. Thus, if the pound rose to $1.50, the American would have to pay $30 for the sweater.