Which of the following best describes the chain of events in the money creation process?
A) The monetary base increases. Banks acquire unplanned reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional unplanned reserves.
B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money.
C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases.
D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.

Question

Quizplus · Accepted Answer

The process described in option A accurately reflects the money creation process in fractional reserve banking systems. Banks lend out excess reserves, which leads to an increase in deposits and thus the quantity of money. These new deposits then become reserves that can be lent out again, further increasing the money supply.

Which of the Following Best Describes the Chain of Events