The banking system plays a key role in the money creation process from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
The banking system is a crucial player in the money creation process. When banks make loans to their customers, they are essentially creating money. This is because when a bank grants a loan, it is simultaneously creating a deposit in the borrower's account. In other words, the act of lending creates new money in the economy. This process is known as the money multiplier effect, where a single dollar of reserves can lead to multiple dollars of deposits and loans. For example, if a bank receives a deposit of $100 and has a reserve requirement of 10%, it can then lend out $90 of that deposit. This $90 is then deposited into another bank, which can in turn lend out $81, and so on. This creates a chain reaction of lending and deposit creation, resulting in a much larger inc...
Similar Posts
Bitcoin fosters individual sovereignty
Bitcoin's ability to foster individual sovereignty is a direct result of its decentralized nature. Unlike traditional fiat curr...
Financial planning is crucial for achieving longterm financial goals
Financial planning is the bedrock upon which long-term financial goals are built. It involves setting specific objectives, crea...
Market timing is difficult and often unsuccessful
Timing the market is a fool's errand, plain and simple. Many people believe they possess the clairvoyance required to predict w...
Monopolies can harm competition and innovation
Monopolies can harm competition and innovation by reducing the incentives for firms to strive for excellence in order to attrac...
The Phillips curve shows a tradeoff between inflation and unemployment
The Phillips curve illustrates the relationship between inflation and unemployment in an economy. It suggests that there is a t...
Supplyside policies influence growth
Supply-side policies refer to government actions that aim to increase the productive capacity of the economy. These policies fo...