Describe the working of commercial banks, Macroeconomics

Assignment Help:

Q. Describe the working of Commercial banks?

Fact that currency inside commercial banks isn't money may strike you as odd though it is an important principle. 100 dollar bill in the ATM will become money only at the instant you withdraw it. The reason is this. We want the money supply to measure how much is available for immediate consumption. Though currency inside a bank can't be used for consumption and this is why it isn't counted in the money supply. Cash in the bank isn't money though the binary bits in the bank's computer system representing the balance in your checking account are?

An illustration may also explain this important fact: 

  • Eric has 100 euro - this amount is obviously part of the money supply as it's immediately available for consumption.
  • Eric deposits 100 euro into his checking account. He still has 100 euro available for immediate consumption employing his debit card and money supply shouldn't be changed by this deposit (it's not - deposits are included in the money supply).
  • Eric's bank now has 100 euro more than before deposit. If we count currency inside the bank as money, money supply would have increased by 100 euro by his deposit. This doesn't make sense as amount available for immediate consumption hasn't changed.
  • similarly withdrawing money from ATM doesn't affect the money supply. When you withdraw money, currency outside banks increases whereas your checking balance decreases by same amount.

Although currency inside a bank isn't money, it's still part of the monetary base. 100 euro inside the bank is clearly still worth 100 euro to the bank although we don't include it in the money supply.


Related Discussions:- Describe the working of commercial banks

Variables are discrete, Which of these variables are discrete and which are...

Which of these variables are discrete and which are continuous random variables? a) The number of new accounts established by a salesperson in a year. b) The time between customer

Economics, n 2013, approximately 58 percent of the adult population (245 mi...

n 2013, approximately 58 percent of the adult population (245 million) was employed, the lowest employment rate in 20 years. If the employment rate increased to the prerecession l

Calculate bright star equity fair value and wacc, After the fall of the kin...

After the fall of the king, a tax rate of 20% has been introduced in the Frog Islands Republic. The value of Sun corporation is now 100.000€. Bright Star Co. debt has no changed. T

TAXATION, What is Inherent Limitation?

What is Inherent Limitation?

Geometric gradient series, Determine the present worth of a geometric gradi...

Determine the present worth of a geometric gradient series with a cash flow of $50,000 in year 1 and increases of 6% each year through year 8. The interest rate is 10% per year.

Define mortgage, When did mortgage? Default and housing foreclosure rates b...

When did mortgage? Default and housing foreclosure rates begin to rise rapidly? When did the economy go into recession? Was there a causal relationship between the two? Discuss.

Calculate the income elasticity and good , Due to the recent downturn in e...

Due to the recent downturn in economic activity, Taz, has seen his hours at work reduced. He used to work 30 hours a week at $13 and hour, but now he works 22 hours. Due to this

Crowding out is associated, Crowding out is associated with: A. an increase...

Crowding out is associated with: A. an increase in business investment resulting from an increase in government borrowing and higher interest rates. B. an increase in private savin

Export promotion measures, Export Promotion Measures: While a number o...

Export Promotion Measures: While a number of  existing  export promotion schemes  such as  incentive related to Duty Free Replenishment Certificate (DFRC), Duty Entitlement Pa

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd