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Chapter 14: Q.19 (page 353)

How do banks create money?

Short Answer

Expert verified

They earn through the interest charged on loans and they advance the services which they offer to guests.

Step by step solution

01

Concept Introduction

Banks make capitalist by charging interest on the capitalist they advance. Bank lends capitalist to the customer on the interest. The interest charged to the lender is advanced than the interest paid to the depositor.

02

Explanation of Solution

The capitalist- making strategy of banks is charging capitalist from the guests or regard holders for every service offered. For illustration, the depositor has paid interest and the bone who takes the loan is charged interest. Besides this, they charge freights on their services like ATM, operation freights, penalty charges, and commissions. Thus, they earn through the interest charged on loans they advance and the services which they offer to guests.

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Most popular questions from this chapter

Explain what will happen to the money multiplier

process if there is an increase in the reserve

requirement?

If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.

Explain why the money listed under assets on a bank balance sheet may not actually be in the bank?

Should banks have to hold 100% of their deposits? Why or why not?

Humongous Bank is the only bank in the economy. The people in this economy have 20\(million in money, and they deposit all their money in Humongous Bank.

a. Humongous Bank decides on a policy of holding\)100reserves. Draw a T-account for the bank.

b. Humongous Bank is required to hold \(5%of its existing\)20million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans.

C. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original$19million loan?
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