Questions: Banks create money by making loans and creating deposits, a process that is limited by the size of banks' excess reserves.

The answer is the first one: making loans and creating deposits, a process that is limited by the size of banks' excess reserves.

Explanation for each option:

1. Making loans and creating deposits, a process that is limited by the size of banks' excess reserves.

   • This is correct. Banks create money through the process of making loans. When a bank issues a loan, it credits the borrower's account with a deposit, effectively creating new money. However, this process is limited by the bank's excess reserves, which are the reserves held by a bank beyond the required minimum set by the central bank.

2. Printing dollar bills without limit.

   • This is incorrect. Banks do not have the authority to print physical currency. The printing of dollar bills is the responsibility of the U.S. Treasury and the Federal Reserve.

3. Printing money up to their required reserve limit.

   • This is incorrect. Banks do not print money. The required reserve limit refers to the minimum reserves a bank must hold, not a limit on printing money.

4. Buying U.S. government securities with cash.

   • This is incorrect. While banks can buy government securities, this action does not create money. It is an investment activity that involves using existing cash reserves.

5. Creating deposits without limit.

   • This is incorrect. While banks can create deposits through lending, they are limited by their reserve requirements and the amount of excess reserves they hold.

In summary, banks primarily create money by making loans and creating deposits, constrained by their excess reserves.