Notes for 3.5.3 The process of money creation by commercial banks (HL only) - IB | RevisionDojo
3.5.3 The process of money creation by commercial banks (HL only) Notes
Commercial banks create money by giving out loans:
Note
The money created by commercial banks is not physical money (notes and coins), but rather digital money in the form of deposits.
Concept of Credit Creation
Commercial banks create money through a process called credit creation.
This occurs when banks lend out a multiple of the deposits they receive, rather than simply lending out the same amount.
The process expands the money supply in the economy, influencing economic activity and liquidity.
The Money Multiplier & Reserve Requirement
The money multiplier determines how much money can be generated from an initialdeposit.
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Questions
Recap questions
1 of 5
Question 1
Recap question
Which of the following would cause the actual money multiplier to be lower than the theoretical value 1/r?
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Note
The process of money creation by commercial banks is a fundamental concept in economics that explains how banks can create money through lending. This process is not about printing physical money, but rather expanding the money supply through loans and deposits.
Commercial banks create money by giving out loans
The money created is not physical cash, but rather digital money in the form of deposits
This process is crucial for understanding how banks contribute to the overall money supply in an economy
AnalogyThink of the money creation process like a tree growing from a seed. The initial deposit is the seed, and each loan given out is like a branch growing from the tree. The tree (money supply) grows much larger than the original seed (deposit).
DefinitionMoney CreationThe process by which commercial banks increase the money supply by issuing loans, which become deposits in the banking system.
