Question

explain one condition that is necessary for a bank to create money and the quantity of money that bank can create, if banks have to back up their deposit customers checking account balances eith reserve assets

right now i am thinking that Loans is one of the conditions on how theyre able to generate more money

Answer 1

Answer - Banks are able to create money with the help of Loans that they give from the deposits and then the money is created through the multiplier process

Let us suppose customer deposits $ 1000 in his account in bank. The reserve ratio of bank is 10 %. Now , money multiplier here = 1/0.10

= 10. This means that total money supply created through this deposit = 1000*10 = $ 10000. Out of this 10 % will go in reserves = $ 1000 . Hence net money supply created = $ 9000. In this way now , the money has also been created and the deposit has been backed by the reserve also. This shows the whole working of how money is created in the banking system.