The Operation of the Banking System and the Creation of Inside Money: An Exercise

This paper is designed to provide students studying in the area of 'Money and Banking' with an understanding of the concept of 'inside money' through a simple balance sheet exercise. The implications for the financial system of the banks ability to create inside money are looked at using the Quantity Theory as a base. The impact of Non-Bank Financial Intermediaries on the financial system through their effect on both the velocity of circulation of the money stock and on the size of the money stock are explored briefly.