In a fractional-reserve banking system, banks create money when they:
A) accept deposits.
B) make loans.
C) hold reserves.
D) exchange currency for deposits.

Question

Quizplus · Accepted Answer

Banks create money by making loans. When a bank provides a loan, it creates new money by adding to the borrower's account, while also creating a corresponding liability for the borrower to pay back the loan. This money creation process is possible because only a fraction of deposits need to be held as reserves, allowing banks to lend out a multiple of the amount of deposits they hold.

In a Fractional-Reserve Banking System, Banks Create Money When They