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Macroeconomic Impact on Business Operations
One of the greatest mysteries of macroeconomics is that banks create the money. This can be understood easier by viewing it as bank debt. A checking account is nothing more than money the bank owes you and paper money represents something that the Federal Reserve owes you (Schenk). Money creation is a side-effect of banking. To completely understand how banks create money it is best to go back to before there were banks and the Federal Reserve. This paper will explain how money was created from its beginning, the inception of the monetary policy and how the monetary policy affects inflation, GDP, unemployment, and achieving a balance between them all.
Before banks evolved in the 16th and 17th centuries, commodity money of gold and silver were used to purchase needed items. Theses metals are heavy and storing large amounts is risky and expensive, carrying them on long trips was dangerous. When used in coined form, it is difficult to determine quality and quantity or weight of the coins. This is because people were known for filing or shaving bits from the coins they obtain before they pass it on to others. Another problem is sweating, this is when people take the coins and shake them in a bag to create gold flakes which are saved for later use. In both cases not all gold coins are of equal value and some of the advantages of the coins are lost (Schenk). The first banks evolved in England due to these deficiencies. Goldsmiths became the fist bankers. This is because merchants needed places to temporarily store large amounts of gold. Goldsmiths were chosen because they had the best security systems of the day (Schenk).Merchants stored the gold with the ...