ABSTRACT
This chapter describes most countries have combined systems of commercial banks and a central bank, which work at least roughly like the system. Money, finance, and interest rates are clearly important macroeconomic issues. Hyperinflation is obviously not a good situation; production tends to be lowered and unemployment raised by the chaos that hyperinflation causes in an economy. Deflation can be very damaging when looked at from the perspective of the real potential productivity of an economy. Japan experienced deflation touched off by a financial crisis in late 1989 after a speculative bubble in real estate and stocks came to a sudden end. Just as domestic finance can funnel funds from savers to investors and hence extend credit to borrowers, trading financial assets across borders means that one country borrows and another country acquires claims. The more financialized an economy, the more of the credit goes into nonproductive activities without an impact on aggregate expenditure.
