The Make Grid tool takes a specified spatial object (point or polygon ) and creates a grid based on the spatial object. The resulting grid is either a single grid, bound to the extent of the input spatial objects, or individual grids that dissect each input polygon.
A single grid is created to the extent of the spatial objects (green polygons) in one layer. You could also use a point object for this type of grid.
A grid is created for each spatial object in the layer (blue polygon) and covers the extent of that object. You can only create this type of grid using polygon spatial objects
By checking the "Clip to Polygons" box, the grid is cut to the boundary of the polygon used to create the grid.
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