How can financial institutions (organisations like banks) contribute to the injection of money in the circular flow in an economy?

Financial institutions, such as banks, play a crucial role in the circular flow of money in an economy. Here's how they contribute:

1. Deposits and Loans: Banks accept deposits from individuals and businesses, which forms a significant part of the money supply in an economy. They then lend this money to other individuals and businesses, which helps to circulate money in the economy.

2. Investment: Financial institutions invest in various sectors of the economy. This investment can be in the form of loans to businesses, purchase of securities, or direct investment in projects. This injects money into the economy, stimulating economic activity.

3. Creation of Money: Banks can also create money through the process of credit creation. When a bank gives out a loan, it doesn't actually hand over the cash, but credits the borrower's account with a deposit of the size of the loan. The borrower can then spend this money, injecting it into the economy.

4. Interest Rates: Financial institutions influence the interest rates in an economy. Lower interest rates encourage borrowing and spending, which injects money into the economy. Higher interest rates encourage saving, which can also be beneficial for the economy in the long term.

5. Financial Services: Banks and other financial institutions provide a range of financial services, including insurance and investment services. These services help to facilitate economic activity and contribute to the flow of money in the economy.

6. Confidence and Stability: By providing a safe place to store money and facilitating transactions, banks contribute to confidence and stability in the economy. This encourages spending and investment, which helps to keep money circulating in the economy.