when banks make loans the money supply

Banks earn profits by borrowing funds from depositors at zero or low rates of interest and using these funds to make loans at higher rates of interest.Their role in money supply is to offer financing—based on a customer's credit—that helps individuals make large purchases for which they do not have cash on hand.If the fed increases the interest rate paid on reserves we expect bank to hold more reserves at the fed and for the money supply to decrease.The fed clears checks for, extends loans to, and holds deposits of banks.It does this by changing the reserves of the banks through three methods.1.

When banks make loans, they put more money into the economy.The rest the bank loans out.Treasury securities, then this 16 increases reserves, encourages banks to make more loans, and increases the money supply.If m 1 = 4.5 and mb decreases by $1 million, the money supply will decrease by $4.5 million, and so forth.When a bank creates a new loan, with an associated new deposit, the bank's balance sheet size increases, and the proportion of the balance sheet that is made up of equity (shareholders' funds, as.

C) exceed actual reserves, a situation of negative excess reserves.Find an answer to your question when banks make loans, they put more money into the economy.Advertisement answer 5.0 /5 57 phd increases, though all good things must come an endIf all banks loan out their excess reserves, the money supply will expand.Net worth equals assets less liabilities.

This is of course until the bank lends further against its reserves to another borrower.As the borrower pays back the money to the bank, the supply of money in the system contracts.Banks use the money collected from depositors to make loans.