Banks create money by taking deposits and making loans through the process of fractional reserve banking. This means that they only have to keep a fraction of the deposits on hand as reserves, and can lend out the rest. When these loans are repaid, the money goes back into the bank and can be loaned out again, effectively creating new money.

Solved

Banks

Question 4

Multiple Choice

Banks

A) create money because they are the ones that print it.
B) create money because they take deposits and make loans.
C) have no role in the money creation process and never have.
D) have no role in the money creation process, though they once did.

Correct Answer: