How does fractional-reserve banking influence the money supply in the United States?(1 point)
Responses
Fractional-reserve banks store the entirety of every depositor's funds, limiting the amount of currency in circulation.
Fractional-reserve banks store the entirety of every depositor's funds, limiting the amount of currency in circulation.
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
Fractional-reserve banks borrow and store funds from lenders, decreasing the number of physical dollars in circulation.
Fractional-reserve banks borrow and store funds from lenders, decreasing the number of physical dollars in circulation.
Fractional-reserve banks are permitted to print currency, increasing the number of physical dollars in circulation.
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
The correct response is:
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
The correct answer is:
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
Fractional-reserve banking refers to a banking system where banks are only required to keep a fraction of their deposit liabilities as reserves and can lend out the remainder. When a depositor deposits money in a bank, the bank is required to keep a certain percentage of that deposit as reserves and can use the rest to make loans. This means that for every dollar that is deposited, the bank can create additional claims on those same dollars through loans.
When the bank lends out this money, it increases the money supply. For example, suppose someone deposits $100 into a fractional-reserve bank. The bank is required to keep a fraction, say 10%, as reserves and can lend out the rest, which is $90. The borrower then spends the $90, and that money becomes a deposit in another bank. This bank is also required to keep a fraction as reserves and can lend out the rest. This process can continue multiple times, leading to a multiplication of the initial deposit and an expansion of the money supply.
So, in fractional-reserve banking, loans are created that increase the number of claims on the same dollars, thereby influencing and expanding the money supply in the United States.