When commercial banks make loans, they

Question

Quizplus · Accepted Answer

When commercial banks make loans, they create new checking account money. This happens through a process called credit creation or deposit multiplication, where loans are made by banks using their excess reserves and the money loaned is added as deposits in the borrower's account. This increases the money supply and can lead to economic growth. However, it also increases the risk of bank runs and financial instability. The other choices are not correct as making loans does not directly increase bank capital, bank reserves or create new currency.

When Commercial Banks Make Loans, They