plzz explain credit creation with a example
and what is liquidity trap ?
speculative and transactive demand of money ?
a) A process whereby banks expand the nation's money supply by increasing ban deposits. Since banks need only keep fractional liquid reserves or deposits, the balance of funds may be advanced to customers seeking credit and used to settle transactions. Advances then return to the banking system as newly created deposits. The main limit on credit creation is the overall size of liquidity ratio set mainly by the reserve bank and bank policy. If a high ratio is held, a bank is unable to make large advances to customers, thereby limiting the credit creation or deposit expansion process.
b)liquidity trap__ A situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline.
c)In Keynesian economics, a need for money for investment purposes. That is, speculative demand for money is the desire to have money for transactions other than those necessary for living. Speculative demand includes risk capital for securities. According to John Maynard Keynes, speculative demand is one of the three desires governing demand for money, the others being precautionary demand and transactions demand.
transactive demand__ The amount of money needed to cover the needs of an individual, firm, or nation. That is, transaction demand for money is a measure of how much of a certain currency people need in order to buy the goods and services they use. Generally speaking, if an economy is healthy, there is a high transaction demand for money because people are buying more goods and services. Conversely, if an economy is in trouble, people buy fewer goods and services. Unless there is a significant, sudden change in the transaction demand, central banks have little trouble adjusting the money supply to accommodate the changes that do occur.