How do banks create money?
A) Banks print new money and distribute it in return for deposits of old money.
B) Banks loan money to the Federal Reserve who then prints new money.
C) Banks cannot create money.
D) Banks create money when they make loans.

Question

Quizplus · Accepted Answer

Banks create money through the process of fractional reserve banking. When a bank receives a deposit, they are required to hold a certain percentage of that deposit as a reserve and can then lend out the remaining amount. The lending of this money creates new deposits and therefore new money in the economy. This process is how banks are able to supply funds for loans and investments.

How Do Banks Create Money