Banks create money whenever they
A) accept a deposit.
B) lend unplanned reserves to a borrower.
C) receive monthly payments on their loans.
D) receive interest on existing loans.

Question

Quizplus · Accepted Answer

Banks create money in the economy primarily through the process of lending out their excess reserves. When a bank lends out a portion of its reserves, it essentially creates new money because the borrower now has new funds in their account, while the original depositor's balance remains unchanged. This process is a fundamental aspect of how the fractional reserve banking system works, allowing banks to expand the money supply beyond the amount of physical currency in circulation. Choices A, C, and D do not directly result in the creation of new money in the economy.

Banks Create Money Whenever They