Bank purpose is to create money.

How they begin to create money.

To understand the other purpose of the bank

Money creation.

More importantly when we began money created how money created we appreciate central banks
money markets actually related.

Problem with bank money related credit rationing.

Access to the loan. It’s a bit problem , access to credit, rich on the otherhand can access to credit,
while student that need more money cannot get the credit.

Focus and the bank and roles in play to create the money,

We now have aprication to borrow and lender.

Very basic function of borrows and lenders. Allowing business to expenses by lending the money.
Important purpose, bank perpuity.

There is a very important thing, money creation

How bank created money, why we actually money in the first places.

Money is a standardization, we need to transacts. In the past we have to barter, food with food.

It has to be cases to have same person to transaction with the food with food.

Money uses to purchase goods and services. Allow us to use purchasing power from one to other
one. Uniform way to actually undertake the transaction. Standradize everything, currency basically
comparing prices. How many dollars to give for a food.

Another issue, money is store of value. Money value is same value in the future, not like rice.

Money is not same as legal tender. More something accustomed with, coin and notes legal tender. A
largest set compare to legal tender, included cheque. What money is golden and silver are money in
the past. Necceserily a money as gold and silver.

What gives money a value?

1. Acceptability or trust
2. Legal tender. : standard issue of central bank, exchangeable. By law people have to accept to
transact with this money.
3. Scarcity: if there is money notes, it will be more invaluable. Relatively scarce.

If there is 3 value that makes the money is have value. Money vs Barter what functionally money is.

Central Bank

Money is different from legal tender, which is also called base money or high powered money.
Unlike bank deposties or cheques. Legal tender has to be accepted as payment by law. It comparises
cash (notes and coins) and accounts held by commercial banks at the central bank called commercial
bank reserves. Deposits and cheques is not legal tender.

Bank the only one can create legal tender, and thus issues notes.

There are two other central bank, commercial bank. Banker to commercial bank.

It actually produces notes and coins, they have to approach the central bank.

Whenever government run deficits, it borrowed money, issued bond to bank central.

Government deficits and monetary policies that related to interest rate.

Accounting. Balance Sheets. To know what money created.

Assets = liabilities – net worth.

Basicily represents summarise what you own and what you owed.

Assets what you own

Liability, what you owed

Equity: what the difference.

If money get created, how does it actually affected the balance sheet in what way.

Recognize: when you lend and borrow. It doesn’t change much to balance sheets.

Take a loan adds both assets and liabilities to the balance sheet.

Questions.

After consuming, net worth decrease to minus. Borrow some money to make the networth .

By lending and borrowing is not created money.

If marco deposits 100 cash in bank

Base money (assets increased)

Payable on demand to marco (liabilities)

Marco purchases 20 to Gina (other people)

Reduction in base money decrease to

Payable on demand decrease to

Transferred to gino bank account

Base money 20
Payable increase 20

Gina borrows 100 from bonus bank

Base money 20

Bank loan 100

And liabilities 120. Created 100 out of nothing.

What logic

Money created 100 in loan, it is simply a number and is also known as bank money. In some way, to
decide to take money more than 30.

Trust is very important, base money is transferred all and bank money transferred to other bank.

Not a major problem if it transferred to same bank. Money increase in the system.

Assets to liabilities. Creating a loan make it increased. If you continue to make loans, created money.

Related to another idea. Reserve ratio, for the amount for your own loan, it must have some some
reserves ratios.

Why they actually this, for every loant hey make, they will have interests. It making money, interests
money the loan. In that respect, you need trust to the system to make it work. If it doesnot it will
create problem.

Suppose, this wasn’t paying 10 dollar, lets say 50 dolars. There will be risks and problem from the
base cash is deficit.

1. Central bank
2. Short term money market.
3. Deposits

The moment they cant withdraw cash that will create problem with trusts.

They make money by making loans. This is called legal tender.

Earn profit, interest on bank money, they give interest deposits less than the lenders.

How money get created in the system.

Central Banks, Money Market and Interest Rates.

What if you draw more than 20$. You are in trouble.

Cost of getting the money is by interest rates.

The need base money, it needs to give money out.

The amount of lending they do, and base they require. How much they actually needs to cover the
withdraws.

Strictly speaking there no relationship.

Gino in this case to make 50$ payment to market. That base money is deficits. More than bbase
money.

What the solution?

Make up for the shortfall by borrowing money.

Commercial banks from money market

Central banks they charged policy rates.

Depositors to make up the short fall.

Mostly they runs into the central banks to help.

Bank can borrow base money on the money market at the policy interest rate.

Cost of borrowing money, depends on how many transactions. If there is much they borrowing will
have to increase interest rates.

Policy rates is set by central bank

So it is same as borrowing central bank itself.

Policy interest rate and Bank lending rate.

Whatever they set, they policy interest rate.

Banking crisis, we talk about what going to happen. Banks make money by giving loan. What
incentives of bank is, they make loan as money as possible. More loan you make, the larger to assets
and larger payable as well.

What is that mean,

Run out the base money, bank run, there will be bankrupt. Bank Run depositors demand their
money at once. May result in bank failure.

How it happen they lose money, if the make poor investment, giving loans that do not get paid back.

The central bank can intervene, because unlike the failure of a firm, a banking crisis can bering down
the financial system.

If they continues bail out bank, the bank will generate profit by using this conditions.

Policy rate and the economy,

Policy rate pass on by individual bank it self. Pass on you will find high interest rate means.
Consumption now have been increase.
Negative relationship between the two variable. Minjem duid.

Interest rate rendah, membuat orang pengen minjem karena indifferent. Tpi klo tinggi dia lebih milih
untuk nunggu atau kurangin konsumsi, sekarang buat abisin di later, karena lebih utility lebih tinggi.

What happened ? is bank needs to ensure enough base money before they have to transfer to the
other accounts.

Whe reisk that banks makes, if there is instant shock, when there will be low trust action, there will
be major issue.

Finacl aspect is Credit Rationing.

Why this occurred. We must understand the problem principal agent problem.

Related: from the perspective of bank confluct of interest between principal and agent, about some
hidden action or attribute of the agent that cannot be enforced or guaranteed in a binding contract.

Boss and employee, the interest is not align. Maximise profit= boss, not same as satisfaction of
employee.

Bank= risk they faced= basic risk they cannot be paid. Depends on the success of the project. Some
sort of information of success of the project, who has the information. If you are project you will
have the information. Cannot have see the effort of the project. It simply cannot be work. They lack
information whether it will be success or not.

Business=

Team projects.
Princiapl agents problem, high marks. You will have runly into this problem. This is way, the natural
way make you will find the way it will actually success.

To resolve the confluct of interest between the principal;

If the project fail you will the borrower, align the incentive. If you slack off, the project your home
and you lose the equity.

There will be a problem. Who are the people that have a equity and collateral, it must be the rich.
But the one who will have needs of borrowing money is the one who poor not rich.

If we want to think the entire problem it completely ridicoulus.

Is the rich and poor.

If you think about the society. Is not the rich, but a poor. You have difficult to get credit. This is why
we have credit rationing.

If you have more money, you will get low interest rate because low risk.

If you have no money, you will get high interest rate. Why the bank do this, actually extremely risky.
You will always guaranteed they will payback his loan.

Credit rationing problem. This okay what the result. They will have more have more opportunity to
invest to those more assets, what about the poor.
MORE INEQUALITY, richer get richer and poorer get poorer. Part of this is due to credit rationing
problem, that how the problem make.

We must trust if not the problem will arise/