The quantity of money that the banking system can create is limited by
A)bank managers' decisions.
B)the monetary base, desired reserves, and desired currency holdings.
C)the number of consumers who apply for loans.
D)the credit ratings of the consumers who are applying for loans.
E)the quantity of bank notes released by the Bank of Canada.

Question

Quizplus · Accepted Answer

The quantity of money that the banking system can create is limited by the monetary base (reserves and currency) that the central bank creates, as well as the bank's desired reserves and desired currency holdings. By controlling these factors, the central bank can limit the amount of money that the banking system can create through loans and other activities. Bank managers' decisions, the number of consumers who apply for loans, and the credit ratings of those consumers can all influence the amount of money that banks create, but they are not the primary limits on the system's capacity to expand the money supply. Similarly, while banknotes released by the central bank can affect the money supply, they are only one part of the equation and do not provide a full limit on the banking system's potential to create new money.

The Quantity of Money That the Banking System Can Create