A Compensating Balance Not Only Forces the Borrower to Be

question 35

True/False

A compensating balance not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower.

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Definitions:

Opportunity Costs

The missed opportunity to benefit from different options when a single choice is made.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Diseconomies of Scale

The phenomenon where an increase in production leads to higher costs per unit due to inefficiencies that arise from scaling up operations.

Increasing Returns

An increase in a firm’s output by a larger percentage than the percentage increase in its inputs.