11. The supply of money.

People’s personal supply of money changes often. Increases and decreases in their supply of money affect how much they spend. Similarly, the amount of money in the total economy changes often. Changes in the economy’s money supply are more complex than changes in a personal money supply. Still, these fluctuations of the money supply influence not only how much spending occurs but also the general level of business activity. The money supply is constantly changing. The government prints new bills and makes new coins every year to replace those that are worn. The supply of checking account money, or demand deposits, also changes. Banking laws require a bank to put a certain percentage of its deposits in reserve. A bank’s reserve is the money the bank must set aside and not loan to anyone, usually 10 to 20 percent.

Expansion will stop if the bank stops making loans. Also, if people stop putting their money into checking accounts, the bank will not be able to make loans.

Also if many people suddenly withdraw their money all at once, the bank must do more than stop making loans. It will have to start calling for payment of its loans so that it can increase its reserves.

• The fluctuations of the money supply influence not only how much spending occurs but also the general level of business activity.

• The money supply of the United States is constantly changing.

• Banking laws in the United States require a bank to put a certain percentage of its deposits in reserve. A bank’s reserve is the money the bank must be 10 percent of total deposits.

• The series of deposits caused the total supply of checking account money to expand.

• This expansion of the money supply does not continue forever.

• WHY^

  • First, federal law requires the bank to keep a percentage of its demand deposits in reserve.

  • Second, expansion will stop if the bank stops making loans.

  • Finally, if many people suddenly withdraw their money all at once, the bank will have to start calling for payment of its loans so that it can increase its reserves.

12. The role of central banks and commercial banks.

When it comes to dealing with money, the banks are the main institutions which can provide a great variety of services. There are two main types of banks.

Central banks control the banking of the whole country and work together with the government to supervise the country’s economy and to issue banknotes and coins. Central banks usually implement monetary policy. Central banks also control the money supply. They supervise the banking system. The central bank can reduce the money supply to commercial banks by changing the reserve requirements.

Commercial banks are banking institutions which people use for their everyday money matters. People may have three basic types of bank account: Current account, Deposit account, Investment account.

Current account is the most popular which is used for everyday transactions such as paying bills, transferring money and drawing cheques. This type of account has some advantages. Firstly, it enables people to hold their money in a safe place. Secondly, this type of account allows people to withdraw their money at any time. Thirdly, it provides people with a cheque book so that they don’t have to carry much cash.

Deposit account is another popular account, which is designed for saving money and may be used for short-term, small savings. The money paid into this type of account earns a small amount of interest. The customer receives no cheque book, so it is not possible to draw cheques or have an overdraft. The advantages are that it’s easier to open a deposit account than a current account because there is no need to have an interview with the branch manager. A client only has to fill in a form and deposit the minimum amount of money required by the bank. Then the client is provided with a pass book. Secondly, a deposit account earns for the account holder. It occurs because the bank invests the money that the depositor pays in and in return the bank pays the client interest.

I the client wants to take his money out of the deposit account he must make a week’s notice. If the client wants his money immediately, he loses some interest.

Savings account is where you put money in regularly and which pays interest, may be used for larger, long-term savings. Money paid into this type of account usually earns more interest, but the customer can’t get his money immediately. The customer may have a fixed-term account. In this case the account holder may not be able to withdraw the money for a certain period agreed with the bank, for instance, 3-5 years.