Year 1 · Foundations · Macro & Economics
Money, Banking & Central Banks
Understand what money is, how commercial banks create deposits through lending, why reserves matter, how central banks influence financial conditions, and how policy moves transmit into bonds, equities, credit, FX and the real economy.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Distinguish cash, bank deposits, central-bank reserves and broader measures of money.
02
Explain how bank lending can create deposits without relying on the simplistic idea that banks merely lend out existing deposits one-for-one.
03
Read a basic commercial-bank balance sheet and identify capital, liquidity and funding constraints.
04
Explain how a policy rate affects short-term market rates and then broader financial conditions.
05
Connect inflation, nominal rates and real rates.
06
Describe why monetary-policy changes can affect government bonds, credit, equities, banks and currencies differently.
CONCEPT MAPHow monetary policy reaches markets and the economy
Cash, deposits, reserves and the functions of money
CORE FACTS · SAME IN EVERY MODE
Money is commonly described by three functions: medium of exchange, unit of account and store of value.
Physical currency and commercial-bank deposits are both used by households and firms as money, but they are different liabilities issued by different institutions.
Central-bank reserves are generally held by eligible financial institutions at the central bank; households do not normally use reserves directly for everyday payments.
Monetary aggregates classify different forms of money according to liquidity and institutional definitions; definitions can differ by jurisdiction.
BeginnerTeaching style changes, knowledge does not.
The dollars in your checking account feel like cash, but technically they are a claim on your bank. The bank owes you that deposit. Separately, the bank may hold reserves at the central bank. Those reserves are part of the payment plumbing between banks, while your deposit is the money you use in daily life.
COMPARISON
Different forms of money
| Form | Issuer | Typical holder | Main use |
|---|---|---|---|
| Currency | Central bank | Public | Payments / store of value |
| Bank deposit | Commercial bank | Households & firms | Payments / saving |
| Reserve balance | Central bank | Eligible financial institutions | Interbank settlement / liquidity |
PROFESSIONAL VOCABULARYUnit of account / unité de compte / unit of account Monetary aggregate / agrégat monétaire / monetary aggregate
The standard in which prices, contracts and accounting values are expressed.
A statistical measure grouping selected forms of money according to an official definition.