Money creation (also known as credit creation) is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased. A central bank may introduce new money into the economy (termed “expansionary monetary policy”, or by detractors “printing money”) by purchasing financial assets or lending money to financial institutions. However, in most countries today, most of the money supply is in the form of bank deposits, which is created by private banks in a fractional reserve banking system. Bank lending increases the amount of broad money beyond the amount of base money originally created by the central bank. Reserve requirements, capital adequacy ratios, and other policies of the central bank influence this process.
Central banks monitor the amount of money in the economy by measuring monetary aggregates such as M2. The effect of monetary policy on the money supply is indicated by comparing these measurements on various dates. For example, in the United States, money supply measured as M2 grew from $6.407 trillion in January 2005, to $8.319 trillion in January 2009.
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