6. How can commercial banks create money? 

Commercial bank is a business in which the main product offered for sale is money.

The incentive in commercial banking is to earn profits. As for the case of commercial banking, a substantial amount of the businesses of commercial banks comes from loans made to businesses. When a business firm borrows a sum of money, the bank places it on the deposit in the firm’s checking account. The business with draws the money as it needs it. Banks create money by loaning out money that was deposited with them. For example:

Andy deposits 100$ at the bank. The banks loan out 80$ to bill. The amount of the 100$ that the bank received as a deposit which can be loaned out depends on the required reserve ratio as set by the Fed

At this point, Andy has 100$ and Bill has 80$ in purchasing power. So the money supply has essentially increased from 100$ to 180$, thus “creating” money.

Further money creation can be achieved if Bill went to a bank and deposited his 80$, then that bank could (assuming the required reserve ration is 20%) loan out 64$ to lard.

7. What are roles and functions of international financial institutions in the world economy?

International institutions include World Bank, international Monetary Fund (IMF), the IFC and the IDA and the Group of Seven (g7). The purposes of these institutions were to help restore the war ravaged nations, aid under-developed nations, assist in stabilizing exchange rates, and facilitate trade by allowing nations to borrow currencies needed to pay for imports.

The World Bank is created in 1944, in Breton Wood, New Hampshire; its headquarters is in Washington D.C. Finance projects in transportation, education, healthcare …Help strengthen private industry

Lending to members of IME only the government offices, agencies or business guarantees by the member governments.

There are requirements for borrowers, Ability to service the loans and show impossibility of others source of finance.

 IME created in 1944.

Membership is not free. Contribution of some percentage of what they will borrow

Supervise a system of fail exchange rate

The aim is to provide assistance to countries facing economic shocks.

One of the main good is to increase 4e world’s economic growth rate and cooperation

Borrowers must agree to any economic reforms as demanded by IME