Ceteris paribus, expanding loans made by the commercial banking system:

Question

Quizplus · Accepted Answer

Expanding loans made by the commercial banking system increases the money supply. This is because when banks make loans, they create new money through the process of fractional reserve banking. As loans are repaid, the money supply contracts, and when new loans are issued, the money supply expands. This expansion can fuel economic growth but can also contribute to inflation if not managed properly. Option A is incorrect because changing the composition of the money supply means altering the types of money in circulation (cash, checking deposits, savings deposits, etc.), which is not directly related to changing the quantity of money. Option B is incorrect because expanding loans increases, rather than decreases, the money supply. Option D is incorrect because expanding loans would likely exacerbate, rather than stabilize, inflation.

Ceteris Paribus, Expanding Loans Made by the Commercial Banking System