1. Explain what money is and how banks create it.

Expert Solution

Money is a monetary term which accepted as payment for goods and services in an economy. This money will be used as repayment measure to pay the debts, taxes etc. There are three major functions were derived for money; medium of exchange store of value and unit of account. Medium of exchange is considered as the most important function of money. Money emerged and created because of the negative effects of barter system. Money will provide freedom and choices among the economic units.
Accepting deposits and lending of money are the two major functions of bank. Bank will create money through accepting or starting new accounts in the bank. Higher interest rate will increase the returns over bank and they make profit through this. The money multiplier will show the exchange and functioning of money in the economy. Lending loans to the customers will add to the liability of the bank. Every new loan provided by a bank creates new money. If the bank provide loan to a person he or she will repay the money after a certain period of time including the interest rate. Thus new money will credited to banks.

Rahul Sunny answered 1 year ago

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1. Explain what money is and how banks create it.

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Explain how banks create money.

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