If you deposit $100 into a demand deposit at a bank, what does this action do to the money supply?
A) It increases the money supply by more than $100.
B) It increases the money supply by less than $100.
C) It decreases the money supply by more than $100.
D) It decreases the money supply by less than $100.

Question

Quizplus · Accepted Answer

When you deposit $100 into a demand deposit at a bank, the bank can then lend out a portion of this deposit to others, while keeping a fraction as reserves. This process of lending and redepositing can increase the money supply by more than the initial $100 deposited, due to the money multiplier effect in the fractional reserve banking system.

If You Deposit $100 into a Demand Deposit at a Bank