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People and businesses lend to the bank through their deposits. The bank keeps a portion of the deposit in reserve and it loans out the rest. Money supply increases because the people who loaned to the bank count their deposit as an asset on their balance sheet. The firm that took a loan from the bank now has money to buy things for their loan.
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Often it is claimed that banks create money by making loans. How can commercial banks create money? Is the....?
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