Question

• How can a bank create money? Give an example.

Pl simple words and 250 words minimum

Answer 1

ANSWER-

A bank is a fiancial instituition whose primary function is to accept the deposits and lending the deposits. The bank create money by performing this function. It is explained in the following way, The banks interest on the depositors money and charge interest to whom it lends money. When a depositors deposits money in a bank than not all the depositors withdraw the money from the bank at the same time. So to utilize these deposits and to earn profits the bank lends it to all those who need money but not all the money is deposists are lended to borrowers as banks also need has to keep the required reserves with it. here bank act as a link between those who have excess money and those who need money. When the depositors deposit money the bank will pay them interest on there deposits which is an expense for the bank and when when lends money they charge interest from the borrowers which is income for the bank and the interest paid to depositors is less than the interest received from the lenders this difference between interest paid to depositors and interest received from borrowers is the profit which bank earns and this is the difference which creates money. So, an individual bank cannot create money but collectively many banks end up creating money as there will be transfer of funds from bank to bank.  

For example - There is a bank A which has a deposit of $10000 and interest which they pay to depositoers is 1% and which the bank receive by lending these deposist is 5% and bank need to keep required reserve of 10% (i.e. 10000@10% = 1000). So the bank will lend the remaining money $9000 at which bank will receive interest @ 5% i.e $450 and the interest the bank pays on $9000 will be 90 ( 90000@1% = 90 ) So the difference between $450 - $ 90 = $360 which is the profit for the bank. and this lended money will be utilized is many other economic activities and in some way will be deposited by some other depositer into another bank this another bank will perform the same function as above so these many banks will end up creating money.