The second sentence is a bit misleading. Reserves are not a prerequisite for lending in our monetary system. The bank gives out all the loans that it deems prof

The second sentence is a bit misleading. Reserves are not a prerequisite for lending in our monetary system. The bank gives out all the loans that it deems profitable and only has to ensure after the fact that its balance with the central bank is sufficient (in your example, if it had loaned out 1700$, it would need to increase the balance by 70$, e.g. by taking out a loan with the central bank). edit: Here is a great explanation: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654 https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Quote: "Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality."