Which of the following statements best explains how financial institutions create money?
A) By opening new chequing accounts and giving more people access to readily available cash, financial institutions expand the money supply.
B) By issuing money through government contracts, financial institutions expand the money supply.
C) By taking deposits and loaning out these funds, financial institutions expand the money supply.
D) By collecting interest on its accounts through investments, financial institutions expand the money supply.
E) By giving interest from its accounts to its clients, financial institutions expand the money supply.

Question

Quizplus · Accepted Answer

Financial institutions create money by taking deposits from customers and then loaning out these funds to borrowers. This expands the money supply as the loaned funds are used for spending and can be deposited back into the financial institution or another institution, creating a cycle of money creation. This process is known as fractional reserve banking.

Which of the Following Statements Best Explains How Financial Institutions