How does fractional-reserve banking influence the money supply in the United States?(1 point)

Question

Responses

Fractional-reserve banks store the entirety of every depositor's funds, limiting the amount of currency in circulation.
Fractional-reserve banks store the entirety of every depositor's funds, limiting the amount of currency in circulation.

Fractional-reserve banks borrow and store funds from lenders, decreasing the number of physical dollars in circulation.
Fractional-reserve banks borrow and store funds from lenders, decreasing the number of physical dollars in circulation.

Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.
Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.

Fractional-reserve banks are permitted to print currency, increasing the number of physical dollars in circulation.

Answer 1

The correct response is:

Fractional-reserve banks issue depositor funds to borrowers, increasing the number of claims made on the same dollars.

In fractional-reserve banking, banks keep only a fraction of deposits on reserve and lend out the rest, which effectively increases the money supply because these loans create new deposits in the banking system. This leads to multiple claims on the same dollars, as the funds can be deposited again, creating additional money through the banking system.