Why does a country's money supply increase when banks use fractional reserve banking?A.Money deposited in banks can be used for loans instead of held in reserve.B.Foreign currency is automatically converted into the country's own currency.C.Banks are given the power to print paper money and mint coins as needed.D.Investors are not allowed to keep large sums of money in banks for long periods
Question
Why does a country's money supply increase when banks use fractional reserve banking?A.Money deposited in banks can be used for loans instead of held in reserve.B.Foreign currency is automatically converted into the country's own currency.C.Banks are given the power to print paper money and mint coins as needed.D.Investors are not allowed to keep large sums of money in banks for long periods
Solution
The money supply of a country increases when banks use fractional reserve banking primarily due to reason A: Money deposited in banks can be used for loans instead of being held in reserve.
Here's a step-by-step explanation:
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When a customer deposits money into a bank, the bank keeps a fraction of that deposit in reserve and loans out the rest. This is the basic principle of fractional reserve banking.
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The money that is loaned out can then be deposited by the borrower into the same bank or another bank, increasing the total amount of money in the banking system.
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The bank receiving this new deposit then repeats the process, keeping a fraction in reserve and loaning out the rest.
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This cycle can continue multiple times, leading to a significant increase in the total money supply in the economy.
The other options (B, C, and D) are not directly related to the increase in money supply due to fractional reserve banking. Banks do not have the power to print money or mint coins (C), foreign currency conversion does not directly affect the money supply (B), and there are no restrictions on investors keeping large sums of money in banks for long periods (D).
Similar Questions
How does fractional reserve banking increase the money supply?A.By using deposited money to make loans without reducing the value of the depositsB.By automatically converting foreign currencies into U.S. dollars on depositC.By guaranteeing that all deposits are held in reserve as cash at all timesD.By giving banks the authority to print their own money in an economic emergency
How does fractional reserve banking grow the economy?A.By forcing a bank to maintain a reserve that covers all deposits made to itB.By allowing the same money to be both stored as a deposit and loaned to businessesC.By giving banks the authority to print their own money during an economic emergencyD.By making it possible for foreign currency to be converted into new U.S. dollars
How does the practice of fractional reserve banking affect banks?A.It ensures that banks always have cash reserves equal to their total deposits.B.It prevents banks from profiting off loans they provide with deposited funds.C.It gives banks the freedom to change interest rates on loans at any time.D.It allows banks to keep only a small percentage of their deposits in reserve.
Banks that practice fractional reserve banking are able to:A.lend most of the money they hold as deposits.B.return all of their deposited cash at any time.C.provide financial services to customers at no cost.D.change the interest rates on loans for any reason.
The banking system increases the money supply by creating Group of answer choicescheckable deposits.currency.checkable deposits and currency.Federal Reserve Notes.
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