Question

Principles list 3: Econ 1

Principle 1. Explain the one condition that is necessary for a bank to create money and the quantity of money that bank can create, if banks’ have to back up their deposit customers’ checking account balances with reserve assets:

Principle 2. Explain the combined quantity of money all the banks in multi-bank banking system will be capable of creating, if one bank is capable of creating money

Principle 3. Explain the one condition that is necessary for a bank to destroy money and the quantity of money that bank will destroy, if banks’ have to back up their deposit customers’ checking account balances with reserve assets:

Principle 4. Explain the combined quantity of money all the banks in multi-bank banking system will destroy, if one bank destroy money

Answer 1

The banking system can create money through the process of creating loans. Fractional reserve banking is banking system in which banks hold a fraction of their customer's deposit. It is called reserve. this allows them to use the rest of it to make loans, and thereby to create new money. this gives commercial banks to power directly affect the money supply. The reseve amount of money depends on the policies adopted by the concerned Central Banks of those countries.

Bank's can't create an ulimited amount of money. The money multiplier determines the limit of how much money a bank can create. The multiplier decides how much the money supply will change if there is achange in the monetery base.

When money is created, every time the bank makes a loan. It is distroyed every time when loan is repaid by the customers. If it repaid partially, partially the money is destroyed. If the consumer to pay credit card bill in full at the end of the month, the bank would reduce the amount of deposit in the consumers account by the value of the credit card bill. Thus destroying all of the newly created money.

In connection with the Central Bank, the main Controller of money market in every country will change the creation and destroying of money by changing the reserve ratio, based on the needs of the economy.