Final answer:
Several factors can limit the banking system's ability to create money, including the reserve requirement, demand for loans, and economic conditions.
Step-by-step explanation:
The ability of the banking system to create money can be limited by several factors. One factor is the reserve requirement set by the central bank. This is the percentage of deposits that banks are required to hold as reserves and not lend out. If the reserve requirement is high, banks will have less excess reserves to create loans and therefore less ability to create money.
Another factor is the demand for loans. If there is a low demand for loans, banks will not have many opportunities to create new money through lending. Additionally, if borrowers are seen as high risk, banks may be reluctant to lend and therefore limit their ability to create money.
Lastly, economic conditions can also influence the banking system's ability to create money. During times of economic instability or recession, banks may be hesitant to make new loans and may tighten their lending standards, limiting their ability to create money.