Which of the following best describes the chain of events in the money creation process?
A) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money.
B) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.
C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases.
D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.

Question

Quizplus · Accepted Answer

The correct chain of events in the money creation process is that the monetary base increases, which leads to banks acquiring excess reserves that they then loan out, increasing deposits and the quantity of money. The new deposits create additional excess reserves, allowing banks to continue making loans and increasing the money supply. This is known as the money multiplier effect. Choices A, C, and D are incorrect because they do not accurately describe this process.

Which of the Following Best Describes the Chain of Events