How Banks Create Credit in the Wider Economy

The video explains how banks and financial institutions create credit in the economy. It clarifies misconceptions about credit creation, emphasizing that banks must balance assets and liabilities on their balance sheets. Through examples, it illustrates how loans and deposits are recorded and how the cash ratio affects the money supply. The video concludes with key takeaways on the credit creation process.

What is the primary role of banks in the economy as discussed in the introduction?

• To print currency

• To store money safely

• To regulate interest rates

• To extend credit to deficit units

When a bank extends a loan, what happens to its balance sheet?

• Neither assets nor liabilities change

• Only assets increase

• Both assets and liabilities increase

• Only liabilities increase

In the example of John borrowing £10,000, what does the liability represent on the bank's balance sheet?

• John's credit score

• The bank's cash reserve

• John's deposit account

• The bank's profit

What is the cash ratio's role in a bank's operations?

• It determines the interest rate

• It limits the amount of cash a bank can hold

• It dictates the percentage of deposits kept in cash form

• It sets the maximum loan amount

How does a higher cash ratio affect a bank's ability to lend?

• It allows the bank to lend more

• It restricts the bank's lending capacity

• It has no effect on lending

• It decreases the bank's profitability

What is the maximum increase in money supply if a bank with a 10% cash ratio receives a £200,000 deposit?

• £1,000,000

• £1,800,000

• £2,000,000

• £200,000

What should banks balance according to the conclusion of the lecture?

• Loan amounts and deposit rates

• Cash reserves and credit scores

• Interest rates and inflation

• Liquidity requirements and profitability