Which of the following is correct?
A) Both the granting and repaying of bank loans expand the aggregate money supply.
B) Granting and repaying bank loans do not affect the money supply.
C) Granting a bank loan destroys money; repaying a bank loan creates money.
D) Granting a bank loan creates money; repaying a bank loan destroys money.

Question

Quizplus · Accepted Answer

Granting a bank loan creates money because the loan recipient has access to new money that did not exist prior to the loan being issued. Repaying a bank loan destroys money because the money that was created through the loan is removed from circulation as it is used to repay the loan. Therefore, the net effect of granting and repaying bank loans is an increase or decrease in the money supply, respectively.

Which of the Following Is Correct