How Do Banks Create Money?
Memory hook: one loan, two entries; the loan is the bank's claim and the deposit is your money.
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1.When a bank grants Marge a 10,000 loan, what are the two entries?
Memory hook: one loan, two entries; the loan is the bank's claim and the deposit is your money.
2.Must a bank first collect deposits before it can grant a loan?
The Bundesbank says excess reserves are not a precondition for a loan.
3.When Marge pays the oven maker at another bank, what must her bank do?
In normal times the central bank supplies those reserves on demand, at its policy rate.
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Sources (3)
- McLeay, M., Radia, A., Thomas, R.: Money creation in the modern economy, Bank of England Quarterly Bulletin 2014 Q1, S. 14-27
- Deutsche Bundesbank: How money is created (Themenseite)
- Eigene Rechnung: Doppelbuchung, Marge nimmt 10.000 Kredit (Uebungsaufgabe)
Education only. Not financial advice.