Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 12 of 23
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When a person deposits cash at bank into own checking account why isn't the cash destroyed to avoid an increase in the money supply?
ChatGPT answer:
When you deposit cash at a bank into your own checking account, the physical cash itself is not destroyed to avoid an increase in the money supply.
Instead, the deposited cash is accounted for and becomes part of the bank's reserves, which affects the bank's ability to lend and create new money.
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Banks operate on a fractional reserve system, which means they are required to hold a fraction of their deposits as reserves.
This reserve requirement is set by regulatory authorities and varies by jurisdiction.
The purpose of reserve requirements is to ensure banks maintain a certain level of liquidity [ability to quickly pay] and can meet customer demands for withdrawals.
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When you deposit cash, a portion of it is set aside as reserves, and the remaining portion can be used by the bank for lending and investment purposes.
This lending activity can potentially lead to the creation of new money in the form of bank deposits.
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To summarize, the deposited cash is not destroyed but rather held as reserves, which affects the bank's lending capacity and has implications for the money supply.
The creation of new money occurs through the lending and borrowing activities of the bank, rather than the act of depositing cash itself.
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Does government creation of paper and coin cash increase the money supply?
ChatGPT answer:
Yes, the government creation of paper and coin cash increases the money supply.
When the government creates and distributes additional paper and coin currency into circulation it effectively expands the money supply within the economy.
This is known as "monetary base expansion" or "base money increase."
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The money supply is typically composed of different components, including physical currency (paper money and coins) and various forms of deposits held by individuals, businesses, and financial institutions.
The government's creation of cash directly affects the physical currency component of the money supply.
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When new paper and coin cash is introduced, it provides individuals and businesses with additional physical currency that can be used for transactions and stored as a form of money.
As a result, the overall money supply increases, as there is more currency available to be exchanged and used within the economy.
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It's important to note while the government's creation of paper and coin cash increases the monetary base, the impact on the broader money supply may be influenced by various factors, such as the public's demand for holding physical cash versus depositing it in banks, and the lending and borrowing activities of financial institutions.
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creation of new money
atarashī okane no sōzō
新しいお金の創造
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