How much money can banks create does this mean that banks, Ask an Expert

Economics

How much money can banks create?

Does this mean that banks can create an unlimited amount of money? The answer is no - that would require them to lend an unlimited amount of money and that is not possible.

Banks use deposits to create new loans but there is an important difference between deposits and loans. When individuals deposit money in a bank, they can withdraw the money whenever they like. A bank, on the other hand, has no right to cancel a loan and get their money back whenever they like. Banks therefore need reserves so that they can deal with large withdrawals. A bank with small reserves will therefore be less inclined to lend money.

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9582405

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