Author Question: Why do banks create money? Do they create money to help the Federal Reserve control the money supply ... (Read 140 times)

nmorano1 · **on:** Jun 29, 2018

Why do banks create money? Do they create money to help the Federal Reserve control the money supply or is there a more basic reason?

What will be an ideal response?

Question 2

Real interest rates at times have been negative. Why would anyone lending money agree to a negative real interest rate?

What will be an ideal response?

stallen · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Banks create money to make a profit. Banks create money when they make loans. The loans take the form of checking account deposits. Asking why banks create money is the same as asking why they make loans.

Answer to Question 2

The lender did not agree to a negative real interest rate, instead unanticipated inflation occurred. If the actual inflation rate exceeds the anticipated inflation rate, the actual real interest rate received by lenders and paid by borrowers can end up negative.