How does fractional reserve banking increase the money supply?
A. By giving banks the authority to print their own money in an economic emergency
B. By guaranteeing that all deposits are held in reserve as cash at all times
C. By automatically converting foreign currencies into U.S. dollars on deposit
D. By using deposited money to make loans without reducing the value of the deposits
Answer (2)
Fractional reserve banking increases the money supply by allowing banks to lend out most of their deposits while retaining a small percentage in reserve. This process leads to a multiplier effect, enabling the banking system to create more money through loans. The correct answer is option D, as it captures the essence of how fractional reserve banking functions. ;
Fractional reserve banking increases the money supply by allowing banks to lend out a portion of deposits while keeping only a fraction as reserves. This creates a multiplier effect, where money is continuously re-circulated through loans. Therefore, the correct answer to the question is D.
;
