The banking system can increase chequing deposits by more than a single bank,because
A) the banking system must keep reserves equal to 100% of its chequing deposits.
B) the central bank follows policies that prevent reserves from falling below the level required by law.
C) excess reserves loaned out by any particular bank will be deposited in some other bank.
D) borrowers often retain a portion of a loan in cash.
E) excess reserves loaned out by any particular bank will be taken out of circulation.

Question

Quizplus · Accepted Answer

Excess reserves loaned out by any particular bank will be deposited in some other bank, which will in turn loan out some of those funds, further increasing the amount of chequing deposits in the banking system. This process is known as the multiplier effect, and it allows the banking system to expand the money supply beyond the initial amount of reserves held by banks. Choices A and B are incorrect because they refer to the reserve requirement, which limits the amount of deposits that banks can create. Choices D and E are also incorrect because they do not explain how the banking system can increase chequing deposits.

The Banking System Can Increase Chequing Deposits by More Than