- Households:
- Provide factor services to enterprises.
- Receive factor payments (income) from enterprises.
- Spend this income to purchase goods and services.
- They also save money by depositing it in banks.
- They keep some money as cash for transactions.
- Banks:
- Accept deposits from the public.
- Lend a fraction of these deposits to others (fractional reserve banking).
- This process creates new money and facilitates its circulation.
- They manage cash reserves and deposits with RBI.
- They enable individuals to transact using deposits (e.g., through cheques).
- This continuous flow between households and banks facilitates money circulation.