A bank creates money by

Question

Quizplus · Accepted Answer

A bank creates money by lending out its excess reserves. This process is known as "fractional reserve banking" in which the bank is required to hold a certain percentage of deposits as reserves and can lend out the rest. The amount that can be lent out increases the money supply in the economy.

B is incorrect because purchasing currency from the Federal Reserve does not create new money, it simply changes the form of the money.

C is incorrect because buying bonds from the Federal Reserve does not create new money, it simply transfers the ownership of the bonds.

D is incorrect because printing more checks does not create new money, the checks are only a means of transferring existing money.

A Bank Creates Money by