question 1

Please use an example to explain the process that the banking system uses to create money. Assume in your example that Bank 1 receives $1,200 from Firm A and sets up a checking account (demand deposits) for Firm A. Three firms, i.e., Firm A, Firm B, and Firm C, will be included in the process. Also assume that Bank 1, Bank 2, and Bank 3 all hold 12% in reserves and lend out the remaining demand deposits to corporations to earn interests.