A reserve bank creates money through a process called “monetary policy.” The central bank, such as the Federal Reserve in the United States, has the authority to create and control the money supply. Here’s a simplified overview of how a reserve bank creates money.Thank you for reading this post, don't forget to subscribe!
The central bank purchases assets: The central bank buys government bonds, securities, and other assets from banks and financial institutions.
The bank credits the seller’s account: When the central bank purchases an asset, it credits the seller’s account with money. This increases the bank’s reserves.
The bank can now lend more money: With increased reserves, the bank can now lend more money to businesses and individuals. This creates new money in the economy.
Lowering the interest rate: To encourage lending, the central bank may lower the interest rate at which banks can borrow from them. This makes it cheaper for banks to lend money to businesses and individuals, which can increase economic activity and stimulate growth.
Increasing the money supply: By purchasing assets, crediting bank accounts, and lowering interest rates, the central bank can increase the money supply in the economy.
Overall, the central bank has a significant role in creating and controlling the money supply in the economy. By using monetary policy tools, the central bank can help regulate inflation, manage the economy, and promote economic growth.