Question

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

Answer 1

The act of providing a loan by the banker to the borrower amounting to $800 after setting aside the reserve amount of $200 contributes to the increase of the money supply by $800.

What is the money supply?

The money supply is the amount that a public held at a point in time including currency notes, coins, and the bank account balances.

When the banker is giving the loan to the borrower at $800 then it infuses the money into the economy as this amount is further given as a loan by another bank to another borrower. This whole cycle goes on to continue till the amount reaches zero.

Therefore, the money supply increases by $800 when the banker gives loans to the borrower for the amount of $800.

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