Money Creation and the Federal Reserve (Coursework Sample)

Discussion on Money Creation and the Federal Reserve
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How Banks Create Money
Banks have a responsibility to ensure that money is available in the economy. Banks create new money whenever they lend (Jordan, 2018). The numbers in their customer's accounts are just accounting entries in the banking system. The numbers are a liability for their customers. When customers use Internet banking or debit cards, they can spend their money as though they were the same in cash. Banks use those liabilities to create a substitute for money effectively. Double-entry accounting rules are vital in the banking industry because direct banks create an equal and opposite liability when they create a new loan asset. The creation is in the form of new demand deposits in the central bank's broad money measures. Thus, banks create money when they lend.
How Federal Reserve Regulates Money Supply and Interest Rates
The Federal Reserve standardises money supply by modifying the amounts banks can hold against