Question

Historical perspective on how banks create money

A) By printing physical currency
B) By borrowing from the Federal Reserve
C) Through the fractional reserve banking system
D) By increasing government spending

Answer 1

Banks create money through the fractional reserve banking system by lending out a fraction of the deposits they receive, which increases the money supply.

Step-by-step explanation:

Banks create money through the fractional reserve banking system. This system allows banks to hold only a fraction of the deposits they receive, while the rest can be lent out to borrowers. When a bank makes a loan, the money is deposited into the borrower's account, increasing the overall deposits in the banking system and effectively increasing the money supply.