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Bank Balance

Run the CLD Viewer with Full Menus with the Bank Balance Example

Here is a causal loop diagram for an interest-earning bank account using two nodes in a clockwise direction.

Causal Loop Diagram: Interest-Earning Bank Account

Nodes:

  1. Bank Balance (positioned at top) - The total amount of money in the account
  2. Interest Earned (positioned at bottom) - The interest income generated by the account

Causal Relationships (Clockwise):

Bank Balance → Interest Earned (Positive/Same Direction) - Description: A higher bank balance generates more interest income - Mechanism: Most savings accounts calculate interest as a percentage of the account balance (e.g., 2% annual percentage yield) - Strength: Strong - directly proportional relationship - Example: $10,000 balance at 2% APY earns $200/year, while $20,000 earns $400/year

Interest Earned → Bank Balance (Positive/Same Direction)
- Description: Interest earnings are deposited back into the account, increasing the total balance - Mechanism: Interest payments (monthly, quarterly, or annually) are added to the principal - Strength: Strong - all interest directly increases balance - Delay: Present - typically 1 month to 1 year depending on compounding frequency

Loop Characteristics:

Loop Type: Reinforcing (R) - This creates compound growth where interest earns interest

Behavior Pattern: Exponential growth over time - The account balance grows at an accelerating rate due to compounding

Time Dynamics: - Short-term: Growth appears linear - Long-term: Growth becomes noticeably exponential, especially with higher interest rates

Mathematical Relationship:

This represents the fundamental compound interest formula: A = P(1 + r)^t, where the feedback loop creates the compounding effect that makes final amounts greater than simple interest calculations.

Real-World Example: Starting with $1,000 at 5% annual interest compounded annually: - Year 1: $1,000 → $50 interest → $1,050 balance - Year 2: $1,050 → $52.50 interest → $1,102.50 balance
- Year 3: $1,102.50 → $55.13 interest → $1,157.63 balance

The reinforcing loop ensures each cycle produces slightly more interest than the previous cycle, creating the compounding effect.