The Financial System & Money Creation
7 important questions on The Financial System & Money Creation
What is the role of the financial system in the economy?
- Connecting savers and borrowers
- Facilitating money flow
- Enhancing overall economic efficiency
- Allowing access to funds for various economic activities
What is the difference between reserves and deposits?
- Reserves are the actual money banks hold at the central bank
- Deposits refer to the funds customers see in their accounts
- They are not interchangeable terms
How does the Official Cash Rate (OCR) influence interest rates?
- Setting rates for borrowing between banks
- Influencing general interest rates across the economy
- Serving as a monetary policy tool for economic management
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What is incorrect about the traditional textbook perspective on bank lending?
- Banks merely lend deposits
- Lending is constrained by reserves
- This oversimplification does not reflect actual lending practices
How do loans impact deposits in the banking system?
- Create new deposits in the borrower’s account
- Literally expand the money supply
- Play a role in increasing overall liquidity
What are the factors influencing bank lending decisions?
- Profit opportunities rather than reserve levels
- The need for banks to manage their reserves
- The economic environment and demand for loans
What is the bottom line regarding the role of banks in money creation?
- Creating new money when they lend
- Not simply reallocating existing money
- Relying on reserves, deposits, and OCR to function effectively
The question on the page originate from the summary of the following study material:
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