Question

First National Bank loans Mike’s Shoe Store $100,000 for remodeling. On their balance sheets, this loan is an asset for Mike’s Shoe Store and a liability for the First National Bank.
a.The loan leads to an increase in the money supply. an asset for Mike’s Shoe Store and a liability for the First National Bank.
b.The loan does not lead to an increase in the money supply. a liability for Mike’s Shoe Store and an asset for the First National Bank.
c.The loan leads to an increase in the money supply. a liability for Mike’s Shoe Store and an asset for the First National Bank.
d.The loan does not lead to an increase in the money supply

Answer 1

Answer:

The answer is: C)The loan leads to an increase in the money supply. a liability for Mike’s Shoe Store and an asset for the First National Bank.

Explanation:

Fractional reserve banking refers to a banking system in which banks keep as reserves only a fraction of the money their clients deposited in them. By doing this, banks are able to use the rest of their clients' money to make loans and other financial operations, therefore creating "new money" and increasing the money supply. For example, a client A deposits $100, the bank keeps in reserve $10, and loans $90 to a different client B. Client A's $100 have created an extra $90 in new money.

When a company gets a bank loan, the loan becomes a liability for the company (they owe money) and an asset for the bank (someone owes them money).