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Money And Banking

Economics notes

Money And Banking

➡️ Money is a medium of exchange that is used to facilitate transactions between buyers and sellers. It is also a store of value, allowing people to save and invest for the future. Banks are financial institutions that provide services such as accepting deposits, making loans, and providing payment services.

➡️ Banks create money through the process of fractional reserve banking. This involves taking deposits from customers and then lending out a portion of those deposits to borrowers. The money created through this process is known as ➡️fractional reserve money➡️ and is an important source of money in the economy.

➡️ Banks also play an important role in the economy by providing liquidity to businesses and households. This allows them to access funds quickly and easily, which helps to facilitate economic activity. Banks also provide a safe place to store money and offer a variety of financial services, such as investment advice and insurance.

What is the role of central banks in the economy?

Central banks play a crucial role in the economy by regulating the money supply, setting interest rates, and providing financial stability. They also act as lenders of last resort to commercial banks and can intervene in the foreign exchange market to maintain the value of the currency.

How do changes in interest rates affect the economy?

Changes in interest rates can have a significant impact on the economy. When interest rates are lowered, it becomes cheaper to borrow money, which can stimulate spending and investment. Conversely, when interest rates are raised, borrowing becomes more expensive, which can slow down economic growth and reduce inflation.

What is the relationship between money supply and inflation?

The relationship between money supply and inflation is complex, but generally, an increase in the money supply can lead to higher inflation. This is because when there is more money in circulation, it can lead to an increase in demand for goods and services, which can drive up prices. However, other factors such as productivity, supply shocks, and expectations can also influence inflation.

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