How_Money_Works_-_The_Facts_Visually_Explained

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GOVERNMENT FINANCE AND PUBLIC MONEY

Managing state finance

Open market operations: selling bonds

The central bank sells bonds back to the market in exchange for money, causing

investors to make withdrawals to buy the bonds, lowering the amount of money

in the banking system. Commercial banks respond by raising interest rates.

Decreasing money in circulation

1668

the year that the

oldest central bank

in the world, the

Swedish Riksbank,

was established

Higher interest rates make central

bank loans more expensive

The central bank sells

bonds to investors

$

$

$

$

$ $

$

$ $

$ $

Investors withdraw money

from banks to buy bonds

Less money

circulates

Commercial banks’

reserves decrease

Higher interest

rates paid

Commercial banks’

reserves decrease

Higher interest rates

make loans more expensive

Higher interest rates

make loans more expensive

$$$

$$$

Less money

circulates

Credit guidance

The central bank’s control of

commercial banks’ licences helps

it to influence how those banks

lend. It can, for example, give them

incentives to offer very low interest

rates to important sectors of

the economy.

Open market operations

The central bank buys and sells

bonds in the open market to affect

the short-term rates of interest.

Credit access

The central bank can restrict

commercial banks’ access to credit,

for example by raising the amount of

deposits they must hold as reserves.

CENTRAL BANK CONTROLS

Raising the reserve (base) rate of interest

The central bank can curtail commercial banks’ lending to the public by raising its

reserve rate of interest. This makes it more expensive for commercial banks to borrow

from central bank reserves. Commercial banks in turn raise interest rates for borrowers.

Central bank Investors in Commercial banks General public Money supply

government bonds

Central bank Commercial banks General public Money supply

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