Question

Money Supply, Financial Policy and International trade (500 word limit)

The process of Creating Deposit Money is one of the most important things in the US and Global Economies, so ….u

Define Money Creation,

INCLUDING at least one (1) numerical example(s) of how it works, and EXPLAINING why it is so vitally important

Answer 1

Money creation plays a pivotal role in explaining the importance of money in the economy. The process of money creation depends on the number of reserves with the banks of the general public which is deposited for withdrawal and are a liability to the banks. The mechanism behind this process is fractional reserve banking. i.e. banks believe that customers will not withdraw their money at once so they retain some amount of the total deposits as reserves and lend the rest of the amount as loans to the public. For example, if there are deposits with banks which is $100 and reserve requirement is 20% means banks may lend 80% of the deposits then money created is 100/ 0.2 = $500