When a fractional reserve banking system is present, can the banking system impact the money supply?
A) No, policymakers set the level of the money supply, and banks are not free to make decisions that impact the money supply.
B) No, the fractional reserve constraint prevents banks from impacting the money supply.
C) Yes, at the moment that a bank accepts a deposit of cash, the money supply immediately increases.
D) Yes, banks decide how much of their excess reserves to loan out. When the loans are made, the money supply grows.

Question

Quizplus · Accepted Answer

In a fractional reserve banking system, banks are required to keep a fraction of deposits as reserves but can loan out the rest. When banks make loans from their excess reserves, the money supply increases because the recipients of the loans have more money to spend, and the original depositors still have access to their deposits. This process can multiply the initial deposit into a larger amount of money in the economy, illustrating how banks can indeed impact the money supply.

When a Fractional Reserve Banking System Is Present, Can the Banking