Question

when commercial banks grant loans: A-total reserves increase B-the money supply is reduced C-the money supply...

when commercial banks grant loans:
A-total reserves increase
B-the money supply is reduced
C-the money supply is increased
D-total reserves decrease

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Answer #1

The Correct answer is C - the money supply is increased

Commercial banks accepts deposits from the public and grants loan to public. The process is known as Credit Creation. When Commercial banks grant loans it usually opens an account of the individual to whom the loan will be granted and it credits the loan amount to his account. Therefore the money supply in the hands of public will increase and when the individual will repay his loan then money supply will decrease as cash in the hands of public will reduce and cash with the banks will increase.

Therefore it can be concluded that the loans granted by the commercial banks will increase money supply.

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