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

MUST and should be in 500 WORDS LIMIT

**If you can't answer in 500 word limit then please don't answer because this is my second time posting this question. I don't want to pay for the same question more times**

Answer 1

Definition of money creation: - Money creation is a process by which in an economic system one deposit creates a circular series of “Deposit-Reserves-Loan-Deposit”. By this series economy get activated for revenue generation activity.

Example of Money Creation:-

Suppose “A” has $ 1000 he decides to deposit in the bank. The bank receives the deposit; retain a minimum required reserve decided by federal body say 10% i.e. $ 100 provide loan of $ 900 to B. B want to use this money for his business hence transfer the loan balance to its business bank account. When B transfers the balance of loan to its current/ saving account, he creates another deposit. Bank use this $900 deposit and after retaining minimum required reserve provide loan facility to another customer of $ 810 and so on this chain continue.

In this way we can observe that one deposit create a chain series of deposit-Reserve-loan-deposit. This activity creates revenue from interest, taxes, processing fee, business revenue and expenses etc. Due to this economy get rotation and it create money.

By the way of creation of minimum required fund level of banks Government control liquidity, interest rate, flow of currency etc. When Government wants to float more money in the market it reduces the level of reserve fund by this banks get more money to provide loan and interest rates get decreased. In vice- versa case Government get increased the limit of minimum fund reserve banks need to increase the reserve they enhanced the interest rate for deposit and on loans. Liquidity get reduced from the market and money flow get controlled.

Why Money creation is important: - Money creation is so vital because funds not received by bank they cannot circulate the same in the system. Due to non-money circulation a vicious cycle will create which impact badly to the economy. As inefficient money creation will make interest rate higher, which make things costly and people may not pay for the same. When paying power does not exist than people get unemployed and manufacturing & service sector may close. Hence money creation is important and this is also important due to following reasons:-

1. To create opportunity for employment
2. To control the liquidity of money in market
3. To provide funds to the needful
4. To secure excess money
5. Best utilization of limited resources
6. To control inflation
7. To stable price of currency.
8. To make thing cheaper
9. To control interest rates of deposit and borrowings
10. To promote manufacturing and service activities.

(Total words 424)