video: how banks create money banks do more than keep your money safe. they need to make money in order to…

video: how banks create money banks do more than keep your money safe. they need to make money in order to continue operating. watch the video to learn how banks use your money to make money and even create it out of nowhere! then, answer the questions. 1. why do banks pay interest on deposits? 2. banks cant actually print new money, but they do increase the overall money supply in the economy. describe how this happens.

video: how banks create money banks do more than keep your money safe. they need to make money in order to continue operating. watch the video to learn how banks use your money to make money and even create it out of nowhere! then, answer the questions. 1. why do banks pay interest on deposits? 2. banks cant actually print new money, but they do increase the overall money supply in the economy. describe how this happens.

Answer

Brief Explanations:

  1. Banks pay interest on deposits to attract customers to deposit money with them. The deposited funds can then be used for lending and other income - generating activities. Also, it compensates depositors for forgoing the immediate use of their money.
  2. Banks increase the money supply through the process of fractional - reserve banking. When a customer deposits money, banks are required to keep a fraction of it as reserves and can lend out the remainder. The money lent out is then redeposited in other banks (either by the borrower or those who receive the borrowed money), and the process repeats, multiplying the initial deposit and increasing the overall money supply.

Answer:

  1. To attract depositors and compensate for the use of their funds.
  2. Through fractional - reserve banking, where banks lend out a portion of deposits, which gets redeposited and further lent, multiplying the money supply.