Which of the following statements is FALSE?
A) When a bank makes a loan and the loan is spent, the lending bank can lose reserves.
B) Loans made by financial depository institutions increase the size of the money supply.
C) Financial institutions, such as commercial banks, take money from depositors to give to borrowers when making a loan.
D) If a bank lends more than the amount of its excess reserves, it will not meet its reserve requirement when the loans clear.

Question

Quizplus · Accepted Answer

Financial institutions, such as commercial banks, do not physically take money from depositors to give to borrowers. Instead, when they make loans, they create money in the form of new deposits for the borrowers, thus increasing the money supply without directly transferring funds from one account to another.

Which of the Following Statements Is FALSE