Finance companies are net creators of private money in the financial system. A. True B. False

Finance companies are net creators of private money in the financial system.

A. True

B. False

Expert Solution

Answer: True

Lets start with the definition of Private Money. Private money refers to lending money to a company or individual by a private individual or organization. There are highers risks associated in this kind of lending for both the borrowers and lenders.

Now the statement says "Finance companies" which would normally mean lending institutions or Non Banking Financial Institutions. These institutions are also involved in lending at higher risks compared to a bank.

So these companies create a net positive private money for two reasons

1) They lend money in to the Financial system

2) There are individuals who borrow from these Finance companies, and lend to individuals who lack the credibility to borrow directly from the finance companies

In both the above cases, there is infusion of cash and hence will "create" private money in the financial system

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