Banking and the Economy

Nektarios Michail

Chapter Chapter 5 in Money, Credit, and Crises, 2021, pp 91-104 from Springer

Abstract: Abstract It is easy to see that through the combination of the factors outlined previously, the banks’ willingness to lend and the peoples’ willingness to borrow will match and create new loans. Lending has the effect of increasing peoples’ purchasing ability and hence overall demand in the economy. This increase in money has important implications for the economy, the final outcome of which is an increase in the inflation rate, if the funds are used for the purchase of the goods or services included in the price index. If the funds are, however, used for the purchase of real estate then these effects are measured through an increase in the index of house prices as well as through the increase in the purchasing power of the people involved in the building industry. Price increases would urge those involved in the real estate sector to invest more, leading to more supply. If the increase in money availability continues, the loop goes on. However, the opposite loop can also manifest: when demand decreases then the feedback loop follows the reverse course, with constant decreases. Finally, the chapter deals with the important issue of over-indebtedness.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-64384-3_5

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DOI: 10.1007/978-3-030-64384-3_5

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