QuestionMay 30, 2025

Why does a country's money supply increase when banks use fractional reserve banking? A. Foreign currency is automatically converted into the country's own currency B. Investors are not allowed to keep large sums of money in banks for long periods. C. Money deposited in banks can be used for loans instead of held in reserve. D. Banks are given the power to print paper money and mint coins as needed.

Why does a country's money supply increase when banks use fractional reserve banking? A. Foreign currency is automatically converted into the country's own currency B. Investors are not allowed to keep large sums of money in banks for long periods. C. Money deposited in banks can be used for loans instead of held in reserve. D. Banks are given the power to print paper money and mint coins as needed.
Why does a country's money supply increase when banks use fractional
reserve banking?
A. Foreign currency is automatically converted into the country's own
currency
B. Investors are not allowed to keep large sums of money in banks
for long periods.
C. Money deposited in banks can be used for loans instead of held in
reserve.
D. Banks are given the power to print paper money and mint coins as
needed.

Solution
4.0(326 votes)

Answer

C. Money deposited in banks can be used for loans instead of held in reserve. Explanation 1. Identify the core concept of fractional reserve banking Fractional reserve banking allows banks to hold only a fraction of deposits as reserves and lend out the remainder. 2. Analyze how lending affects money supply When banks lend out deposited money, it creates new money in the economy because the borrower receives funds while the depositor's balance remains unchanged. 3. Determine which option aligns with this process Option C states that money deposited in banks can be used for loans instead of held in reserve, directly reflecting the mechanism of fractional reserve banking.

Explanation

1. Identify the core concept of fractional reserve banking<br /> Fractional reserve banking allows banks to hold only a fraction of deposits as reserves and lend out the remainder.<br /><br />2. Analyze how lending affects money supply<br /> When banks lend out deposited money, it creates new money in the economy because the borrower receives funds while the depositor's balance remains unchanged.<br /><br />3. Determine which option aligns with this process<br /> Option C states that money deposited in banks can be used for loans instead of held in reserve, directly reflecting the mechanism of fractional reserve banking.
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