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Chapter 27: Q.19 (page 663)

How do banks create money?

Short Answer

Expert verified

Banks earn through the interest charged on loans and they advance the services which they offer to guests.

Step by step solution

01

Concept Introduction

Banks make capitalist by charging interest on the capitalist they advance. Bank lends capitalist to the customer on the interest. The interest charged to the lender is advanced than the interest paid to the depositor.

02

Explanation

The capitalist- making strategy of banks is charging capitalist from the guests or regard holders for every service offered. For illustration, the depositor has paid interest and the bone who takes the loan is charged interest. Besides this, they charge freights on their services like ATM, operation freights, penalty charges, and commissions. Thus, they earn through the interest charged on loans they advance and the services which they offer to guests.

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Most popular questions from this chapter

Explain the difference between how you would

characterize bank deposits and loans as assets and liabilities on your own personal balance sheet and how a bank would characterize deposits and loans as assets and liabilities on its balance sheet.

Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans) for a bank or other financial services company. Explain why you would be willing to pay more or less for a given loan if:

  1. The borrower has been late on a number of loan payments
  2. Interest rates in the economy as a whole have risen since the bank made the loan
  3. The borrower is a firm that has just declared a high level of profits
  4. Interest rates in the economy as a whole have fallen since the bank made the loan

How do you calculate a bank's net worth?

In many casinos, a person buys chips to use for gambling. Within the casino's walls, customers often can use these chips to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money?

How does the existence of money simplify the process of buying and selling?
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