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

Question

Responses

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 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 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 a fractional-reserve banking system, banks keep a fraction of deposits as reserves and lend out the rest. This practice effectively increases the money supply because it allows banks to create new loans, which increases the total amount of money in circulation through a process known as the money multiplier. Each loan made can lead to further deposits and subsequent loans, resulting in multiple claims on the same initial deposit.