A bank participates in the creation of money when it
A) adds to its required reserves.
B) receives a deposit of currency.
C) raises its interest rates.
D) becomes a member of the Federal Reserve System.
E) lends its excess reserves.

Question

Quizplus · Accepted Answer

When a bank lends out its excess reserves, it effectively creates new money in the economy. This is because the borrower receives the funds as a deposit, which can then be used to make purchases or pay bills. The bank's reserves are reduced by the amount of the loan, but the money supply expands as a result.

A Bank Participates in the Creation of Money When It