How does fractional-reserve banking influence the money supply in the United States?(1 point) Responses 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 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 are permitted to print currency, increasing the number of physical dollars in circulation.
Fractional-reserve banking is a process by which banks only keep a fraction of the total amount of deposits in reserve and lend out the rest. This practice influences the money supply in the United States in the following way:
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars. This means that when a depositor makes a deposit at a bank, only a portion of that deposit is held as reserves, while the remainder is lent out to borrowers. The funds lent out are then used by borrowers to make purchases or investments, effectively increasing the money supply.
This process creates a multiplier effect, where the initial deposit leads to the creation of new money as it cycles through the economy. Each time the borrowed funds are spent or deposited in another bank, a new loan can be made, creating more money. This expansion of the money supply is a key mechanism through which fractional-reserve banking influences the economy.
It is important to note that fractional-reserve banks do not have the authority to print currency. The Federal Reserve, which is the central bank of the United States, is responsible for the creation and control of physical dollars in circulation.