A bank can create money by
A)converting reserves into securities.
B)lending its excess reserves.
C)selling some of its securities.
D)increasing its reserves.
E)printing more cheques.

Question

Quizplus · Accepted Answer

When a bank loans out its excess reserves, it is essentially creating new money. This is because when the borrower receives the loan, they are able to spend it, increasing the amount of money in circulation. The bank still has the original amount of reserves, but now there is also additional money in the economy. However, the other options listed do not involve the creation of new money. Converting reserves into securities just changes the form of the bank's assets, selling securities decreases the amount of the bank's assets, increasing reserves does not necessarily create new money if the reserves were already held in excess of requirements, and printing more cheques does not necessarily create new money if the cheques are being drawn on existing funds.

A Bank Can Create Money by