Money Creation (HL only)
Demand Management (Monetary Policy)
AO2·HL
Syllabus requirement
Explains how commercial banks create money through fractional reserve banking.
Assessment objectives
AO2 Application and Analysis
Higher LevelThis topic is assessed at HL.
Summary
This extract explains how central banks use open market operations (OMO) — buying and selling government securities — to change the money supply, and notes the basic assumption behind money creation by commercial banks. It describes government securities as public sector debt used to finance government operations and explains that selling securities can reduce the money supply and help slow inflation or stabilise growth.
