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
Financial education is essential for making informed decisions
Understanding the intricacies of financial markets and economic principles is crucial for individuals to navigate the complex w...
The Federal Reserve's actions had a major impact on the economy during the 1930s
The Federal Reserve's actions in the 1930s played a crucial role in shaping the economic landscape of the United States during ...
The impact of monetary policy on interest rates can influence investment decisions
Monetary policy plays a crucial role in shaping interest rates, which in turn can have a significant impact on investment decis...
Exchange rates impact international trade and investment
Exchange rates play a crucial role in determining the competitiveness of a country's goods and services in the global market. W...
Role of monetary policy in economic stability
Monetary policy plays a crucial role in maintaining economic stability by influencing the money supply, interest rates, and inf...
Environmental economics considers the impact on the environment
Environmental economics focuses on the relationship between the economy and the environment. It considers how economic activiti...