CGP uses to Investing Company wants

pay off debt to add capital stock

Paid to CGP Capital Good

producer

CIRCUIT THEORY
Bank – finance
Issuing of long production. Pay for
term securities inputs like workers and
raw material

Accumulated Workers save a

saving in Economy part of it
Role of Banking
• Help to start circuit process.
• Provide firms with commercial loans to finance inputs.
• Money is created in form of deposits as bank a/c are credited with
that amount of loan.
• Act as intermediaries in capital market, taking long term deposits
from the public and making k=long term loan to firms.
Limitations-
• Fails to exploit full analytical potential from studying banks and non-
bank financial institutons
• Fails to identify the role that finance plays at the end of the circuit
process, where decisions on fund allocation may allow or inhibit the
closure of the circuit and determine eco. Multiple equilbria
Banks
Banks
• Banks allow circuit process to start
• Provide loans to finance inputs and op sales
• Money is created in form of demand deposit which are credited in form of
loans in borrowers account
• At any point d=cr
• If deposits are used to purchase goods by purchasing firms , then utilize the
money initially to create wealth and then payoff the bank debt.
• Incomes are reduced if deposits are not utilised
NBFC

Intermediaries operating in capital market.

Aggregate saving from several sources and allocate them to find users
Incorporates interest rate on long term savings
firms
• They produce goods for ehich they need money
• They borroe loans from banks
• Pay to factor of production including labor
• Appropriate loans initially and then repay to banks
Households

Buys commodity firms are producing

Provide labor supply to firms,
Money earned is used to buy commodity firms are producing
Part of it saved with them