A single bank is limited in its ability to create money because
A)loan recipients usually take the proceeds of the loan in cash.
B)the FDIC will not permit it to create money unless the loans are guaranteed by the federal government.
C)the money loaned will probably be deposited in another bank.
D)federal legislation prohibits banks from creating money except to finance international trade.

Question

Quizplus · Accepted Answer

When a bank creates a loan, it creates new money by adding a deposit to the borrower’s account. However, the borrower will likely use that money to make purchases or repay debts to other people or businesses, so that money will likely leave the bank and be deposited in another bank. This means that the original bank’s ability to create money is limited.

A Single Bank Is Limited in Its Ability to Create