Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy

16 thoughts on “Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy

  1. Guess you can explain QE next… Where are the missing trillions? Those two things would be great to do videos on…

  2. One of the problems of our economic system (one of many), is where does the money come from to pay the interest on the loans from the banks? There is only so much money in the economy at any one time.

  3. Fractional reserve banking does not really create money. Instead, it increases the availability of money as it is not left sitting in a vault. For example, as the fractional reserve requirement for a bank decreases from for example 10% to 5%, there would be more of the deposit to loan. However, if the fractional reserve requirement approached zero, according to this analysis the amount of money in the economy would approach infinity.

    Clearly that is not the case. If someone loans a dollar to a friend who loans it to someone else, and let us say this goes on a million times, we don't have an extra million dollars in the economy. It's just a bunch of people who owe someone the one dollar that exists.

    In the United States money is created by the Federal Reserve. They are the only ones who have the legal right to bring money into existance. Excessive creation of money, in excess of a compensatory increase in the goods and services of that society (the USA in this case) is the only cause of sustained long-term inflation.

    There is no rule that the government must increase the monetary supply. In fact, if they stopped doing this, there would be a deflationary pressure on the dollar. This means the cost of items would decrease and the money citizens saved in the bank would actually increase in purchasing power over time. This would certainly be a favorable change from the constant excessive money production which causes inflation over time.

    This is an important aspect of economics to understand. The fractional reserve system does not create money.

  4. Wait a second. That doesnt mean new money is created. If after loaning 900 dollars, the person who deposits in Bank A wants to take all of his 1000 dollars. Surely bank couldnt do that. And why is 900 dollars loaned an asset when in fact there is no cash hence bank is unable to give the whole 1000 dollars to the person who initially deposited.

  5. Every banknote is a interest-bearing promissory note.
    When money is created, interest rates are not created.
    We are all modern debt slaves.

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