Question
1. Explain how banks create money?
Answers
Answered by
GPT 3.5
Banks create money through the process of fractional reserve banking. When a bank receives a deposit from a customer, they are required to hold only a fraction of that deposit in reserves (usually about 10%) and can lend out the rest.
For example, if a customer deposits $1,000 into their account, the bank can hold $100 in reserves and lend out the remaining $900 to another customer. This $900 loan becomes a new deposit in the banking system, which the bank can then use to make additional loans. This process continues, creating even more money in the economy.
In essence, banks are able to create money by leveraging the deposits they hold and creating new money through the lending process. This is how banks play a crucial role in the expansion of the money supply and the overall economy.
For example, if a customer deposits $1,000 into their account, the bank can hold $100 in reserves and lend out the remaining $900 to another customer. This $900 loan becomes a new deposit in the banking system, which the bank can then use to make additional loans. This process continues, creating even more money in the economy.
In essence, banks are able to create money by leveraging the deposits they hold and creating new money through the lending process. This is how banks play a crucial role in the expansion of the money supply and the overall economy.