(b) Explain in your own words how market forces facing individual banks limit the amount of deposit money banks can create. That is, explain Figure 2 with details.

(c) How much banks can lend is also limited by banks risk management associated with loans. Explain.

Figure 2 Money creation for an individual bank making an additional loanca) Changes to the balance sheets of the house buyer and seller House House seller House House seller uabilutes Llabilities Balance sheets beforethe loan ls made. The house buyer takes outamortgage... Changes to the balance sheets of the housebuyer and seller's banks Buyer's bank Seller's bank Buyer's bank Seller's bank Depostts Resewes Deposts Reserves Balance sheets berore the loan ls made. The mortgage lender creates new deposits... House House seller -and uses its new deposits to pay the house seller. Buyer's bank Seller's bank Reserves Depatts Reserves which are transferred to the sellers bank, along with reserves. which the buyers bankuses to settle the transaction. But settling all transactions In this way would be unsustainable: The buyersbank would have fewer reserves to meet its possible outflows, for example from deposit withdrawals. And rit made many new loans itwould eventually run out of reserves. Buyer's bank Seller's bank New loan Deposits Sothe buyer's bank wil inpractice seek to attract or retaln new deposits and reserves) the example shown here, from the sellers bank. to accompany their new loans