Critiquing an Inter-Bank Transfer Analysis
An economics student observes a transaction where Bank X grants a $20,000 loan to a borrower, who then immediately uses the funds to pay a supplier that holds an account at Bank Y. After observing the settlement, the student concludes: 'This transaction has no net effect on the overall money supply. The $20,000 deposit created by Bank X was immediately extinguished when the payment was made, so the money creation was temporary and ultimately cancelled out. The only lasting change is that reserves moved from Bank X to Bank Y.'
Evaluate the student's conclusion. Is their reasoning sound? Justify your answer by explaining the final impact on the deposit liabilities of the banking system as a whole.
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Critiquing an Inter-Bank Transfer Analysis
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