Question

A group of economics students gathered to study for a test on the money and banking system in the U.S. During a fast and furious brainstorm session, Jill scribbled down several key phrases she will use to study tomorrow. Unfortunately, in her haste, all the statements in her notes are incorrect:
- Two forms of money include cash and credit cards because both are accepted as payment.
- All savings accounts are considered transaction accounts because they represent money.
- Consumers who make loan payments create transaction accounts.
- If I open a savings account at a bank with cash received as a birthday gift, I'll increase the money supply in the economy.
- By creating transaction accounts, even a single bank has unlimited power to affect the money supply.
- If a bank has $10 million in reserves and an additional $3 million in excess reserves, it can make loans up to $13 million.

What advise would you offer Jill about statement E above?

Answer 1

the amount of loan a bank can make is limited tothe amount equal to its excess reserve.