Economics of Financial Markets how do banks create money
- Created by: AmyTSpokes
- Created on: 16-05-15 19:58
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- How do banks create money?
- Banks create money by lending to those who need to borrow from savers
- Banking systems
- Fractional reserve banking system
- banks keep a fraction of the deposits as reserves (use the rest to make loans)
- CB establishes a reserve requirement, banks may hold more than this amount
- Creates money but not wealth
- banks keep a fraction of the deposits as reserves (use the rest to make loans)
- no banking system
- public holds 100% of reserves, no loans are made
- 100% reserve banking system
- bank holds 100% of funds in reserves, meaning it makes no loans
- Fractional reserve banking system
- multiplier affect
- amount of money the banking system generates with each pound of reserves
- money multiplier= 1/R R=Reserves
- amount of money the banking system generates with each pound of reserves
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