Final answer:
Personal savings create capital through deposits in financial institutions, which are then used for loans and investments, generating income for the institutions and contributing to their capital. Borrowing against deposits and the matching of funds by the Federal Reserve also play a role in creating capital.
Step-by-step explanation:
Personal savings can create capital in multiple ways. One way is through making deposits in financial institutions, such as banks. These institutions use the deposited funds to provide loans to individuals or businesses for large or long-term purchases. By lending out the saved money, the financial institutions earn interest and generate income, which contributes to their capital.
Another way personal savings create capital is when banks borrow against deposits to pay interest on the funds held. This borrowing allows the banks to attract more customers and invest in various ventures, further increasing their capital.
Additionally, funds accumulated in financial institutions are matched by the Federal Reserve, which serves as a regulatory body for banks. The matching of funds by the Federal Reserve increases the overall amount of capital available for lending and investment purposes.
Learn more about Personal savings and its role in creating capital