Q how much money can banks createdoes that mean that banks, Ask an Expert

Economics

Q. How much money can banks create?

Does that mean that banks can create an unlimited amount of money? No the answer is no - it would require them to lend an unlimited amount of money and as we know that is not possible.

Banks use deposits to create new loans though there is a significant difference between loans anddeposits. When individuals deposit money in a bank, they may withdraw the money whenever they like. A bank, conversely, has no right to cancel a loan and get their money back whenever they want to. Banks thus need reserves so that they can deal with large withdrawals. A bank with small reserves will hence be less inclined to lend money.

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Macroeconomics, Economics

Category:- Macroeconomics
Reference No.:- M9577303

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