The Central Bank

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Jamie B. Andersen
Jamie B. Andersen's picture
The Central Bank

hi ,

its my first time asking a question here but as i was reading about the central bank i didn't get the money making process.
if a bank has $ X in the bank and i want to loan $X (lets say that i can and the bank doesn't need to reserve some of the money).
but when i pay to the bank back the loan i need to give him back $X+ interest .
from i get the additional money to pay the interest ?

thanks

Jason Pride
Jason Pride's picture

Hi Jamie,

If you are taking a loan the expectation is that either you have sufficient free income to cover the principal and interest on the loan or you will be investing the borrowed funds in something that will pay back at a higher rate than the interest rate on the loan. For example a manufacturing company that takes out a loan to purchase new equipment will expect that the new equipment will increase revenue by a higher rate than the interest rate on the loan either through lower operating costs or higher production rates.