Final answer:
Singleton Bank issues a $9 million loan to Hank's Auto Supply, which is then deposited into a checking account at First National, increasing both deposits and reserves at the bank and illustrating the potential multiplication of the money supply through the banking system.
Step-by-step explanation:
The scenario described involves Singleton Bank lending $9 million to Hank's Auto Supply, which illustrates how the banking system can create money through the process of making loans that are deposited into demand deposit accounts. When Singleton Bank issues the loan to Hank's Auto Supply, it records the loan as an asset on its balance sheet, because the loan will generate interest income. However, instead of giving Hank's Auto Supply $9 million in cash, the bank provides a cashier's check, which is then deposited into Hank's account with First National. This deposit increases First National's deposits and reserves by $9 million. By reserve requirements, First National is required to hold 10% of the deposit as reserves but can loan out the rest. Consequently, if First National loans out the available funds, the money supply can increase even further, underscoring how loans and deposits can multiply the money supply within the economy.