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The Reserve Bank, private sector banks and the creation of money and credit.

This article provides an overview of the functions of money, and how money and credit are created in the economy. The roles of the Reserve Bank and private sector banks are illustrated, and we explain the link between money and monetary policy.

1 Introduction

Money and credit, the products of the financial system, are important parts of our economy. The financial system enables 'real' activity--that is, the processes of production and trade of goods and services--to take place smoothly. Financial activity is thus part and parcel of economic growth and improvement in overall living standards. (1)

Money itself is not a modern innovation. Records of money date back 5,000 ...

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