Money Supply – Meaning
According to the modern economy, money incorporates cash and bank deposits. Depending on what sort of bank deposits are being incorporated, there are many measures of money. These are founded and created by a structure, including two types of establishments which are known as central banks and commercial banks. Let’s know more about them in the following lines.
A central bank is a significant establishment in the modern economy. Almost every nation has a central bank. India’s central bank, the Reserve Bank of India (RBI), was founded in 1935. The central bank has various significant operations.
It supplies and issues the currency of the nation and regulates the money supply of the country through various methodologies like bank rate, open market operations, and differences in reserve ratios. It functions as a banker to the government and as a custodian or guardian to the foreign exchange reserves of the economy. It also functions as an overseer to the nation’s banking structure.
A commercial bank is that sort of establishment which is the money-generating part of the economy. In the following segment, we will understand the commercial banking system in detail. It accepts deposits from the public and lends parts of these funds to those who want to borrow.
The rate of interest paid by the banks to the depositors is less than the rate levied from the borrowers. This difference between these two types of interest rates is known as the spread, which is the profit earmarked by the bank.
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