Final answer:
The lending by Singleton Bank and subsequent deposits into First National and potentially Second National illustrate the process by which banks can increase the money supply through fractional-reserve banking. This process involves banks holding a fraction of deposits as reserves and lending out the rest, which can then be re-deposited, creating a multiplier effect.
Step-by-step explanation:
When Singleton Bank lends $9 million to Hank's Auto Supply, this loan becomes an asset on the bank's balance sheet, expected to generate interest income. Instead of providing physical cash, the bank issues a cashier's check to Hank, who then deposits this amount in his account with First National. This action increases both the deposits and the reserves of First National by $9 million. Given reserve requirements set by the central bank, First National is obligated to hold 10% of the deposit amount ($900,000) as required reserves. The remaining 90% ($8.1 million) can be loaned out to other customers like Jack's Chevy Dealership.
As a result, the issuance and subsequent deposit of the loan into Hank's account and the potential loan to Jack's significantly increase the money supply in the economy. If Jack deposits the $8.1 million loan into his account at Second National, the money supply rises further, showcasing the multiplicative effect of bank lending on money creation. The mechanism described here is a fundamental concept in banking known as the fractional-reserve banking system.