Commercial banks create new money
A) by printing currency.
B) by issuing cheques.
C) through multiple rounds of lending and borrowing.
D) when they buy government bonds from the Bank of Canada.
E) when they increase their desired reserve-deposit ratio.

Question

Quizplus · Accepted Answer

Commercial banks create new money through the process of multiple rounds of lending and borrowing. When a bank lends out money, it creates a new deposit in the borrower's account. This new deposit can then be used by the borrower to make purchases or payments, which in turn becomes a deposit in another bank account. This cycle of lending and borrowing creates new money in the economy. Options A, B, D, and E are incorrect because they do not involve the creation of new money by commercial banks.

Commercial Banks Create New Money