Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,
A) the supply of money is increased by $5,000.
B) the supply of money declines by the amount of the loan.
C) a claim has been "demonetized."
D) the Metro Bank acquires reserves from other banks.

Question

Quizplus · Accepted Answer

When the Standard Internet Company receives a checkable deposit from the Metro National Bank, the supply of money is increased by the amount of the loan, which is $5,000. This is because checkable deposits are included in the definition of the money supply, and they can be used to make purchases just like cash. Therefore, there is an increase in the money supply when a loan is taken out and a deposit is made.

Assume the Standard Internet Company Negotiates a Loan for $5,000