How does fractional reserve banking increase the money supply? A. By giving banks the authority to print their own money in an economic emergency
B. By guaranteeing that all deposits are held in reserve as cash at all times
C. By using deposited money to make loans without reducing the value of the deposits
D. By automatically converting foreign currencies into U.S. dollars on deposit
How does fractional reserve banking increase the money supply?
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The correct answer is: C. By using deposited money to make loans without reducing the value of the deposits.
Explanation: In fractional reserve banking, banks are required to keep only a fraction of their deposits as reserves. This allows them to lend out the majority of the deposited funds while still meeting withdrawal demands. When banks make loans, they effectively create new money because the borrower now has access to funds that can be used, while the original deposit remains in the bank, creating a multiplier effect that increases the overall money supply in the economy.