Money Creation in a Fractional Reserve Banking System

In this video we illustrate the process by which money is created in a fractional reserve banking system. Due to the fact that at any given time a bank must only keep a certain percentage of its total deposits on reserve, an initial deposit of a certain amount of money will be multiplied as the bank loans out any excess reserves, whose spending leads to further new deposits and even further loans in the economy.

Through this process money is actually multiplied and created. This gives monetary policy makers the ability to stimulate or contract the overall level of spending in an economy through its buying and selling of government bonds from the private sector on the open market.

 

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