Banks create money by
A)printing dollar bills without limit.
B)creating deposits without limit.
C)printing money up to their required reserve limit.
D)making loans and creating deposits,a process that is limited by the size of banks' excess reserves.
E)buying U.S.government securities with cash.

Question

Quizplus · Accepted Answer

Banks create money by making loans and creating new deposits, which ultimately increases the money supply in the economy. This process is limited by the bank's excess reserves, and not by the amount of cash or government securities they have on hand. Option A is incorrect because banks cannot print physical dollars, only the Federal Reserve has that authority. Option B is incorrect because there are regulatory limits on the amount of deposits banks can create. Option C is also incorrect because a bank's required reserve limit does not determine the amount of money it can create. Option E is incorrect because buying government securities with cash does not directly create new deposits or increase the money supply.

Banks Create Money by