Classified in Economy

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Money Creation

In economics, money creation is the Process by which the money supply of a country or a monetary region (such as The Eurozone) is increased. A central bank may introduce new money into the Economy by purchasing financial assets or lending money to financial Institutions. Commercial bank lending also creates money under the form of Demand deposits.

Central banks monitor the amount of money in The economy by measuring monetary aggregates such as M2. The effect of monetary Policy on the money supply is indicated by comparing these measurements on Various dates.

In other words, Central bank Extends a loan to a commercial ban : new commercial bank money is created. Central Bank can also create money by purchasing financial asset. Commercial bank keeps The required fraction of loan sum as deposit, and extends a loan to other Commercial banks. Other banks also keep the required fraction as deposit, and Are free to re-loan the rest. Because the loan counts as money, the total Monetary supply increase. As a loan is paid back, more commercial bank money Disappears from existence. Since loans are continually being issued in a Normally functioning economy, the amount of broad money in the economy remains Relatively stable.

The most common mechanism used to measure this Increase in the money supply is typically called the money multiplier. It is the maximum amount of money commercial banks can legally create for a Given quantity of reserves

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