How does fractional-reserve banking influence the money supply in the United States?
a
Fractional-reserve banks are permitted to print currency, increasing the number of physical dollars in circulation.
b
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
c
Fractional-reserve banks borrow and store funds from lenders, decreasing the number of physical dollars in circulation.
d
Fractional-reserve banks store the entirety of every depositor's funds, limiting the amount of currency in circulation.
b. Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
b
Fractional-reserve banking influences the money supply in the United States by issuing depositor funds to borrowers, which increases the number of claims made on the same dollars. The process works as follows:
1. Depositors keep their money in banks, which is considered a liability for the bank.
2. Banks are only required to keep a fraction of these deposits as reserves (hence the name fractional-reserve banking), while the rest can be lent out as loans.
3. When banks lend out these deposits, borrowers receive the loaned money, which they can use for various purposes.
4. However, the deposits remain in the bank as well, meaning there are now multiple claims (depositor and borrower) on the same dollars.
5. This effectively increases the money supply in the economy because the total amount of money available for use has increased, even though the physical amount of dollars in circulation has remained the same.