3.5.2 (HL)—Money creation and monetary tools

Commercial banks create deposits when they lend; central banks influence conditions through policy rates, reserve/liquidity operations and communication.

Lending depends on capital, risk, regulation and demand, so money creation is not a fixed multiplier.

Identify balance-sheet entries and the tool’s intended channel.

A new loan credits a borrower deposit; repayment destroys that deposit balance.

Banks do not simply lend out every deposit one-for-one.

Commercial-bank lending creates a matching loan asset and customer deposit liability; repayment extinguishes deposit money. The central bank can buy securities through open-market operations to add reserves and liquidity, reduce minimum reserve requirements to ease a lending constraint, lower its base/discount/refinancing rate to reduce short-term funding costs, or use quantitative easing to purchase longer-term assets and lower yields. Reverse directions tighten conditions. These tools influence lending but do not compel creditworthy borrowers or banks to transact.