How do banks create new deposits?

Question

Quizplus · Accepted Answer

Banks create new deposits by lending out excess reserves, which means they are using funds that they were not required to keep on reserve. This process is known as the "money multiplier effect," where a bank's initial lending creates new deposits, which can then be lent out again by other banks, creating even more deposits. This cycle continues until the desired level of reserves is reached. Therefore, option A is the correct answer.

How Do Banks Create New Deposits