Commercial banks are able to create money by

Question

Quizplus · Accepted Answer

Commercial banks create money by making loans. When a bank approves a loan, it credits the borrower's account with new funds. These funds are created out of thin air and increase the money supply in the economy. This is known as the money creation process.

Option A is incorrect because commercial banks cannot print Federal Reserve Notes. Only the Federal Reserve has the authority to print currency.

Option C is incorrect because when customers pay back their loans, they are merely returning funds that were previously created. This does not create new money in the economy.

Option D is incorrect because exchanging reserves at the Fed for vault cash does not create new money either. It simply changes the form of the bank's reserves.

Commercial Banks Are Able to Create Money by