Raster animation is created by displaying a sequence of raster images rapidly to create the illusion of motion. Each raster image is stored as a bitmap in system memory and contains information about individual pixels that make up the image. By refreshing the frame buffer with a new bitmap, raster animation is created. There are two main types - traditional using sprite sheets and modern using programming languages. Raster animation provides more realistic images than vector animation but requires more memory and processing power. It is used for applications like 3D/2D animation, games, and movies.