Question

1. According to the Bank of England, money is created when a bank makes a loan and destroyed with the loan is repaid. Explain this statement.
                                                                                                                                       [8 marks]

Answer 1

Just as taking out a new loan creates money, bank loan repayments are destroying money. For example , suppose a consumer has used a credit card to spend money in the supermarket throughout the month. Every purchase made using a credit card will increase the outstanding loans on the consumer's balance sheet and the deposits on the supermarket's balance sheet If the consumer were then to pay his credit card bill in full at the end of the month, his bank would reduce the amount of deposits on the consumer's account by the value of the credit card bill, destroying all the newly credited money.

Banks making loans and consumers repaying them are the most significant ways of creating and destroying bank deposits in the modern economy

Although commercial banks generate capital by lending, they are unable to do so openly without restriction. Banks are limited in how much they can lend to stay profitable within a competitive banking system. Prudential regulation also acts as a constraint on the activities of banks so as to maintain the financial system 's resilience. And the families and Companies who collect the money generated by new loans will take action who changes the stock of capital so they will 'kill' money easily by using it to repay their money
Present Debt