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Answer: Money creation is a process with the help of which the money supply or the flow of money in one country can be increased or it can also be decreased in the same manner. The money creation process is done by the banks as they provide loans to the public from the amount of money which the local public deposits with them. Money supply is also a form of credit creation or bank deposits. The central bank of each country forms and regulated the different bank rates as per which the bank has to operate in the market or in the industry and these regulations can also give rise to the inflation or deflation in the country as the supply of money is wholly in the control of central bank and the regulations made by the central bank of the country. The Treasury normally issues bonds to finance some portion of the government’s expenditures. The central bank then buys in the open market an amount of these sufficient to put in circulation the appropriate quantity of money. In some cases, the central bank may buy bonds directly from the Treasury, who puts the funds in circulation when it makes government expenditures with them.
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