Which of the following essential factors enables commercial banks to create money?

Question

Quizplus · Accepted Answer

Commercial banks can create money by using excess reserves to issue loans and by the process of deposit multiplication. When banks issue loans, the borrowed money is credited to the borrower's account, which increases the bank's liabilities and also its assets, as it now has a claim on the borrower's repayments. This increases the bank's excess reserves, which it can then use to issue more loans, leading to further deposit multiplication and money creation. Required reserves, state and local government securities, U.S. government securities, and net worth are all important factors for banks, but they are not directly related to the process of creating money through lending activities.

Which of the Following Essential Factors Enables Commercial Banks to Create