A bank creates money when it:
A) gets new checkable deposits which the depositor formerly held as cash.
B) has a loan paid off, which creates excess reserves for the bank.
C) makes a loan from its excess reserves.
D) holds back excess reserves because of an increase in the required reserve ratio.

Question

Quizplus · Accepted Answer

When a bank makes a loan from its excess reserves, it effectively creates new money. This is because the loan increases the money supply by adding to the total amount of deposits in the banking system, without immediately reducing the cash holdings of any other economic entity.

A Bank Creates Money When It