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how much does federal reserve bank has to lend to banks ? i read that fed can lend as much as gdp to banks . is that true ?

Theoretically, the federal reserve can lend an infinite amount of money to banks.  Of course, there would be problems with this, though.  

First of all, anytime banks borrow money, they must repay that money including interest, so banks tend not to borrow any more money than they need to - that is, when they can take that money are lend it to someone else at a higher interest rate than they are paying.  That's how banks earn money, but it is cheaper to lend-out the money they raise in checking and savings accounts than it is to borrow funds.

The other thing to consider is that increasing money supply inappropriately will lead to devastating levels of inflation.  A look through history and you'll see that other nations have attempted to do as you are describing: they'll just create more and more money and either use it to pay national debts or lend it out.  Germany tried it after WW1 and experienced severe hyperinflation, Argentina went through hyperinflation as the result of monetary mismanagement in the 1970s-1980s, Zimbabwe's recent hyperinflation was partially the result of monetary mismanagement, as well.

So, while the fed is theoretically capable of lending an infinite amount of money, it could never happen in "the real world".  Not only would such an action be easily recognized and receive immediate global attention (every action the federal reserve takes is available to the public) resulting in severe backlash, but they are also limited by simple supply and demand, wherein there simply isn't the demand for lending at the federal-funds rate (the interest rate that the fed lends at) because banks can get their funding more cheaply using other means and must also have an outlet for re-lending those funds at a rate higher than the federal-funds rate.


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Michael Taillard


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Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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