Question

How do banks create money? Please discuss in detail.

Answer 1

Banks creates money by lending to its customers from his deposits. when the bank receives some deposits from thier customers , the banks keeps the minimum reserves of the deposits amount according to reserve ratio set by the central bank and then bank lends the remaing excess reserves to the customers. when this customer deposits the same amount of loan to another bank , then that bank also keeps minimum reserves and loan out the excess reserves to his customer. this process of keeping reserves and loan will keep continue until the original deposits is exhausted completely .This is the process of bank creates money.