Which of the following best describes the chain of events in the money creation process?
A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.
B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money.
C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases.
D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.

Question

Quizplus · Accepted Answer

The correct chain of events in the money creation process is that an increase in the monetary base (such as through open market operations by the central bank) leads to banks acquiring excess reserves. Banks then loan out these excess reserves, increasing deposits and also the quantity of money. The new deposits also create additional excess reserves that may be loaned out, leading to a multiplier effect in the creation of money. This chain of events is known as the multiplier effect. Option A correctly captures this process. Option B is incorrect as loans are not spent, but are used to purchase goods and services, which circulate within the economy. Option C is incorrect as desired reserves do not directly impact the creation of money, but rather influence the lending activities of banks. Option D is incorrect as low interest rates encourage spending and investing, not the holding of currency in deposits.

Which of the Following Best Describes the Chain of Events