Question

How does a commercial bank like BancFirst increase the money supply and provide​ liquidity? A. By...

How does a commercial bank like BancFirst increase the money supply and provide​ liquidity?

A.

By taking in deposits and making loans

B.

By clearing checks to ensure that cash is deducted from the check​ writer's account and deposited into the check​ receiver's account

C.

By producing paper currency and coins

D.

By lending money to the government by buying bonds issued by the Treasury Department

E.

By paying deposit insurance premiums to the FDIC​ and/or NCUA

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Homework Answers

Answer #1

The correct answer is Option (A) By taking in deposits and making loans

Explanation -

It is important to note that the United States or any country in the world (for that matter), has fractional reserve banking system. In this system, a single deposit can be multiplied several times when money is given out as loan.

Therefore, banks can increase money supply by accepting deposits and giving loans. As credit growth increase, the money supply in the system also increases.

Just as an example, if the reserve requirement in the United States is 10%,

The money multiplier is = 1 / Reserve Requirement = 1 / 0.1 = 10.

In other words, a deposit of $100 can expand to $1000 through a chain of transaction within the banking system.

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