The process of converting money supply into demand deposits is known as?

The correct answer is - Credit creation

Key Points

• Credit creation
  • Credit creation is the process by which banks create money in the form of demand deposits, which are essentially checking account balances.
  • When a bank issues a loan, it credits the borrower's account with a deposit, thereby creating new money.
  • This process increases the total money supply in the economy, as the borrower can now spend the newly created funds.
  • Credit creation is a critical function of the banking system, enabling economic growth and expansion.

Additional Information

• Monetary policy
  • Monetary policy refers to the actions undertaken by a nation's central bank to control the money supply and achieve macroeconomic goals such as controlling inflation, consumption, growth, and liquidity.
  • Central banks use tools like interest rates, reserve requirements, and open market operations to manage the economy.
• Fiscal policy
  • Fiscal policy involves the government adjusting its spending levels and tax rates to influence a nation's economy.It is used to manage economic cycles, achieve economic growth, and reduce unemployment.
  • Key tools include government spending and taxation.
• Exchange rate mechanism
  • The exchange rate mechanism (ERM) is a system intended to manage a country's currency exchange rate relative to other currencies.
  • It aims to reduce exchange rate volatility and achieve monetary stability by linking currencies to a common standard, such as the euro.