Explain in a paragraph, how commercial banks create money? (checkable deposit, deposit multiplier, formulas, etc.)

Individual banks are prohibited from printing their own money. Nevertheless, banks may create money by creating checkable deposits, which are a part of the money supply. In order to see this, let's work through the process step-bystep. Step One: Suppose the Central Bank prints $1,000 and decides to deposit it in Bank A. Step Two: Bank A sets aside the portion of that $1,000 that is required reserves. For this example, assume that the required reserve ratio is 10 percent. So, $100 is set aside, and the remaining $900 becomes excess reserves. Step Three: Bank A decides to lend that $900 to Jenny, who then deposits that $900 in her account. At this point, the money supply has increased. The $1,000 the Central Bank printed remains in the system, and we can now add Jenny's $900 to this. Step Four: Jenny's Bank B sets aside 10 percent of her $900that is, $90as required reserves. The remaining $810 becomes excess reserves. Step Five: Jenny's Bank B now has $810 that may be lentan action that will increase the money supply again. The process continues until no new excess reserves can be created. The maximum amount of new money that may be created from any new money can be derived using the formula: Maximum change in checkable deposits = 1/rx AR where r = the requiredreserve ratio and AR = the change in total reserves resulting from the initial injection of funds. The expression (1 m in the formula above is known as the simple deposit multiplier. The money expansion process described had two major players: the Central Bank and the banking system. The Central Bank directly created $1,000, which made it possible for banks to create $9,000 in checkable deposits. The formula for nding out how much money the banking system can create out of any given amount of funds is: Maximum change in checkable deposits (brought about by the banking system) = 1/rx AER where r= the required-reserve ratio and AER = the change in excess reserves of the rst bank to receive the initial injection of funds