In an unregulated environment, the commercial banking system would tend to vary the supply of money in a way that
A) increased the money supply to the maximum at all times.
B) decreased the money supply to the minimum at all times.
C) emphasized the use of currency over demand deposits.
D) reinforced cyclical variations in the economy.

Question

Quizplus · Accepted Answer

In an unregulated environment, commercial banks would tend to reinforce cyclical variations in the economy by increasing the money supply during booms and decreasing it during contractions. This is because banks would be motivated by profit and would extend credit when there is high demand for it and willing borrowers, and they would contract credit when the risks of default are high or when there is low demand for lending. This behavior would amplify fluctuations in the economy, which could lead to more severe booms and busts.

In an Unregulated Environment, the Commercial Banking System Would Tend