When a bank grants a loan to a customer who gets the funds and keeps them at home for a while, the money supply will
A) not change because demand deposits did not go up.
B) not change because the money was not spent.
C) increase.
D) decrease.

Question

Quizplus · Accepted Answer

When the bank grants a loan and the customer keeps the funds at home, the money supply increases. This is because the loan created new money in the form of demand deposits, which are part of the money supply. Even though the money was not spent initially, it is still part of the money supply until it is paid back to the bank.

When a Bank Grants a Loan to a Customer Who