Money, Banking and the central Banking system - determining the money supply
3 important questions on Money, Banking and the central Banking system - determining the money supply
What is the disadvantage of not having banks?
Without banks
- there would be no chequable deposits: the quantity of currency in circulation would equal the money supply
- money supply would be controlled only by the government who controls the printing
Do banks help in the creation of money? In what 2 ways do they affect the money supply?
- Banks remove some currency from circulation:
- dollar bills that are sitting in bank vaults as opposed to sitting in people wallets, are not part of the money supply
- banks create money:
- by accepting deposits and making loans , they make the money supply larger than the value of the currency in circulation
What happens in the first creation of money supply?
- The initial deposit will serve not as money in circulation but as a deposit, in which the bank will create a demand deposit for the depositor.
- this initial stage has no effect on the money supply
- when the initial depositor deposits their money, that money leaves the circulation, and the money supply falls by that amount
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