Question 1

If banks create money through lending, can they create an infinite amount?

Accepted Answer

No, they cannot. Credit creation is limited by several factors. The most important is the liquidity ratio (or reserve requirement), which forces banks to hold a certain percentage of deposits as liquid assets. Other limitations include the demand for loans from creditworthy borrowers, the willingness of banks to lend, and the central bank's monetary policy actions, such as changing the policy interest rate to influence the cost of borrowing.

Question 2

Is a credit card 'money'?

Accepted Answer

Strictly speaking, a credit card is not money. It is a tool for accessing a pre-approved, short-term loan from the bank that issued the card. The actual 'money' is the bank deposit that is electronically transferred to the seller's account to settle the transaction. Therefore, a credit card is a means of payment that relies on deferring the use of actual money (bank deposits), which functions as the medium of exchange.

Question 3

Does the central bank control the government?

Accepted Answer

No, the central bank acts as the government's banker but does not control it. In most developed economies, the central bank has operational independence from the government, particularly in setting monetary policy. This independence is designed to prevent short-term political pressures from influencing decisions about interest rates, thereby helping to maintain long-term price stability. The central bank advises the government, but fiscal policy (taxation and government spending) remains under the government's control.

Money and banking

What you need to know

Money and banking