Banks expand the money supply by

Question

Quizplus · Accepted Answer

Banks expand the money supply by taking in deposits (which creates new money) and then lending that money out to borrowers. This is known as the fractional reserve banking system. When borrowers repay their loans, that money is then deposited back into the bank, allowing them to lend out even more money and further expand the money supply. Opening new chequing accounts, earning higher profits, and paying interest on accounts do not directly expand the money supply. Printing money is the role of the central bank and can also expand the money supply, but this is not typically done by commercial banks.

Banks Expand the Money Supply by