The banking system increases the money supply by creating Group of answer choicescheckable deposits.currency.checkable deposits and currency.Federal Reserve Notes.
Question
The banking system increases the money supply by creating Group of answer choicescheckable deposits.currency.checkable deposits and currency.Federal Reserve Notes.
Solution
The banking system increases the money supply by creating checkable deposits and currency.
Here's a step-by-step explanation:
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When a bank receives deposits, it keeps a portion of it as reserves and lends out the rest. This is known as the fractional reserve banking system.
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The money that is lent out is then deposited in another bank, which again keeps a portion as reserves and lends out the rest. This process continues, leading to a multiplication of the initial deposit, thereby increasing the money supply.
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This process creates checkable deposits, which are a part of the money supply. Checkable deposits are deposits in bank accounts from which deposited funds can be withdrawn at any time without any notice to the depository institution.
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Banks also increase the money supply by creating currency. When banks give out loans, they can either credit the borrower's account, creating a checkable deposit, or they can give it in the form of currency. Both of these increase the money supply.
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Federal Reserve Notes, on the other hand, are issued by the Federal Reserve, the central bank of the United States, and not by commercial banks. Therefore, they are not a way that the banking system increases the money supply.
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