The quantity of money that the banking system can create is limited by
A)the number of consumers who apply for loans.
B)the monetary base, desired reserves, and desired currency holdings.
C)bank managers' decisions.
D)the credit ratings of the consumers who are applying for loans.
E)the quantity of bank notes released by the Bank of Canada.

Question

Quizplus · Accepted Answer

The quantity of money that the banking system can create is limited by the monetary base (which is controlled by the central bank), desired reserves (which banks keep on hand as a percentage of deposits), and desired currency holdings (which is the amount of cash that customers keep outside of banks). The other factors listed may affect the lending decisions of banks, but they do not directly determine the quantity of money that the banking system can create.

The Quantity of Money That the Banking System Can Create