How do banks "create" money?

Question

Quizplus · Accepted Answer

Banks create money primarily through the process of taking in deposits and making loans. When a bank receives a deposit, it is able to hold onto a portion of that deposit as a reserve and lend out the rest. The borrower of the loan then uses that money to make payments, which often end up in another bank account, thus allowing the process to continue. This process is known as fractional reserve banking and allows banks to create money out of thin air, as the loans they make are not backed by physical currency. While banks do handle the minting and printing of physical currency, this is a much smaller part of their overall role in the economy.

How Do Banks "Create" Money