Discussion: Money and Banking


Answer ONE of the following questions (around 200 words ).  In this forum, you will not see your peers’ posts after you post.

Option 1: How do banks create money in the United States? Carefully explain how the fractional reserve system works.  Do a little research and determine the current reserve requirements.  Are you surprised about the percentage of money that banks hold as reserves? Do you expect the reserve requirement to be higher or lower?  Share your thoughts.


Option 2: Consider the following items:

  • Gold Coins
  • Grocery Store Coupons
  • Funds in a checking account
  • Funds in a savings account
  • 100 shares of Google stock
  • Food Stamps

Which of these items is the best example of money? Which is the worst? How would you order the list from most money-like to least money-like? Explain your reasoning.

Solution Preview (We have completed a similar project; please click on the image below to preview and click order now to get a unique plagiarism-free solution from us). We are always happy to serve you!)</strong 

Banks create money by accepting deposits and lending money. Money is created when banks lend more than what they receive in deposits. So everytime a bank credits a person’s account with a loan money is created. The difference between the deposits in the bank and loans given by the bank is due to reserve requirements. It allows the bank to extend more loans as compared to what it receives in deposits. Money creation happens due to this.

Fractional Reserves System refers to the requirement of maintaining a fraction of the deposits that banks receives through their customers. For example if a bank receives $100 in deposit, then it can’t lend entire $100 to its customer.

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