Which of the following best describes the chain of events in the money creation process?
A) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.
B) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases.
C) 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.
D) 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.

Question

Quizplus · Accepted Answer

The money creation process starts with the increase in the monetary base, which leads to the creation of excess reserves. Banks use these excess reserves to make loans, which in turn increase deposits and the quantity of money. The new deposits then create additional excess reserves, which can be loaned out again, further increasing deposits and the quantity of money. This process is known as the multiplier effect.

Which of the Following Best Describes the Chain of Events