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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