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Money Market Mechanics
This document provides a high-level overview of how money is created in the modern U.S. banking system. It describes that money primarily takes the form of currency and demand deposits. Banks have the ability to create money by making loans, which increases their deposits that are counted as part of the money supply. However, banks must maintain required reserves to back their deposits, and these reserves ultimately come from the Federal Reserve, giving the Fed control over the money supply. The amount of money created from additional reserves depends on the required reserve ratio. Several factors influence how changes in reserves impact the actual money supply.
