A commercial bank has no excess reserves until a depositor places $5000 in cash at the bank. The commercial bank then lends $4000 to a borrower. As a consequence of these transactions the size of the money supply has:

Question

Quizplus · Accepted Answer

The initial deposit of $5000 increases the bank's reserves, allowing it to lend $4000. This loan increases the money supply by $4000, as the borrower now has $4000 in new money to spend.

A Commercial Bank Has No Excess Reserves Until a Depositor