ECON 2 Lecture Notes - Lecture 14: Commercial Bank, Money Creation, Financial Institution
27 Aug 2020
School
Department
Course
Professor
Hao Tran
htran170@ivc.edu
Macroeconomics
Notes: Econ 2
Properties of Money
As a medium of exchange, money needs the following properties.
1. Durability: Money needs to be durable to withstand the frequent movement from one hand
to another as a medium of exchange.
2. Acceptability: Money must be acceptable by all those involved in transactions otherwise it
will collapse as a medium of exchange.
3. Divisibility: Money should be divisible to facilitate effective exchange since different
goods and services fetch various prices.
4. Portability: Money should not be cumbersome to carry
5. Liquidity: Money should be liquid i.e. it should be easy to carry out transactions using it.
Financial Institutions
Are organizations legally bound to deal with finances. There are three categories of these
institutions namely: -
● Commercial Banks
● Central Bank
● Non-bank financial institutions
A commercial bank is a financial institution, which accepts deposits and gives credit. It performs
three main functions:
● To facilitate exchange
● To provide facilities for savings to depositors
● Distribute credit to business enterprise and consumers
Creation of Money
Document Summary
Are organizations legally bound to deal with finances. There are three categories of these institutions namely: - A commercial bank is a financial institution, which accepts deposits and gives credit. To provide facilities for savings to depositors. Distribute credit to business enterprise and consumers. This is the process by which banks multiply money in the economy using customer"s deposits. When an individual deposits cash in a bank, the deposited cash becomes a liability to the bank and an asset to the depositor. The bank converts this liability into an asset in form of reserves and loans given out to borrowers. This process of money creation is referred to as credit creation and it operates as follows: Suppose that there is only one bank, a. This process continues indefinitely, subject to the following limitations: (i) Lack of demand for loans (iii) cash drain. Central bank is the financial institution at the center of the banking system.
