Topic

Money Creation

Instructions

Read pages 731-743 of Economics.

Consider the following as you read:

Why is the U.S. banking system called a “fractional reserve” system?
How can a bank create money?

Answer preview

In the contemporary banking system, banks are permitted to keep a small percentage of their deposits on reserve because the depositors might want to withdraw their deposits. The United States banking system is termed as the “fractional reserve” system because the U.S direct finance is a more critical portion of the investment facilitation than banking. Notably, direct finance is a situation in which an individual wishes to lend cash to a main organization either via purchasing bonds or purchasing stock and that firm puts those funds for growth, expansion and pay return rate. It is clear that a remarkable share of American investment is financed via banking.

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