Question

Assume that a bank receives a deposit of $1,000 in cash, puts aside $200 as required reserves, and makes a loan of $800, this set of transactions will:______

Answer 1

Answer: e. increases the money supply by $800

Step-by-step explanation:

The scenario described in the question is how money is created in an economy. Banks take deposits and loan them out to entities who would then deposit this loan in another bank (for instance) which would then give it out as loans as well.

The process will theoretically continue till it reaches zero. When the bank in the question made a loan of $800 out of the $1,000 therefore, it was increasing the money supply by $800.