How does fractional-reserve banking influence the money supply in the United States?
Fractional-reserve banking influences the money supply in the United States by allowing banks to create money through the process of deposit creation. When individuals or businesses deposit money into their bank accounts, only a fraction of that money needs to be kept in reserve by the bank, while the rest can be lent out to other borrowers. This allows banks to effectively increase the money supply by creating new loans and deposits.
As loans are repaid, the money circulates back into the banking system, allowing banks to make new loans and further increase the money supply. This process of money creation and circulation within the banking system contributes to the expansion of the overall money supply in the economy.
Additionally, fractional-reserve banking can also lead to the creation of credit, as banks can lend out more money than they actually have in reserves. This can further inflate the money supply and have an impact on economic activity and inflation levels.
Overall, fractional-reserve banking plays a significant role in influencing the money supply in the United States by allowing banks to create money through the lending process, leading to an expansion of the money supply in the economy.