Final answer:
The correct option is a). Fractional reserve banking speeds up the flow of investment and wages in the free-market system by allowing banks to create credit, which increases the money supply and supports economic activity.
Step-by-step explanation:
The question asks what speeds up the flow of investment and wages in the circular flow of the free-market system. The correct answer to this is a) Fractional reserve banking, which is the practice of banks keeping only a fraction of their deposits in reserve as cash on hand and available for withdrawal. This system allows banks to create credit, which significantly speeds up the flow of money through the economy.
Fractional reserve banking increases the money supply by allowing banks to lend out a portion of their deposits, thus facilitating more investment and wage circulation. The term for the rule which states the percentage of every deposit to be set aside is known as the reserve requirement. Open market operations, which involve the buying and selling of government securities by a central bank, like the Federal Reserve, can also affect the money supply and hence the flow of investment and wages in an economy.
An increase in reserve requirements would reduce the money supply as more funds would be retained in banks, decreasing the amount available for lending. In contrast, a decrease in reserve requirements typically increases the money supply, providing more capacity for banks to grant loans, and thereby accelerating economic activity.