When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions
A) decreases the money supply by $1,000.
B) decreases the money supply by $200.
C) does not change the money supply.
D) increases the money supply by $200.
E) increases the money supply by $800.

Question

Quizplus · Accepted Answer

When the banker accepts the deposit, the $1,000 is already part of the money supply. By making a loan of $800, the bank creates new money, thus increasing the money supply by $800.

When a Banker Accepts a Deposit of $1,000 in Cash