A group of economics students gathered to study for a test on the money and bank

Question

A group of economics students gathered to study for a test on the money and banking system in the U.S. During a fast and furious brainstorm session, Jill scribbled down several key phrases she will use to study tomorrow. Unfortunately, in her haste, all the statements in her notes are incorrect:

- Two forms of money include cash and credit cards because both are accepted as payment.
- All savings accounts are considered transaction accounts because they represent money.
- Consumers who make loan payments create transaction accounts.
- If I open a savings account at a bank with cash received as a birthday gift, I'll increase the money supply in the economy.
- By creating transaction accounts, even a single bank has unlimited power to affect the money supply.
- If a bank has $10 million in reserves and an additional $3 million in excess reserves, it can make loans up to $13 million.

What advise would you offer Jill about statement E above?

1)       By creating transaction accounts of an amount that exceeds a bank's excess reserves, even a single bank has unlimited power to affect the money supply.
      A single bank is limited in its power to affect the money supply due to the number of banks in existence and because of regulations that the Federal Reserve impose.
      Only a single bank that has assets in excess of its liabilities can affect the money supply.
       Only a bank that has been granted a waiver by the FDIC has authority to affect the money sup

Explanation / Answer

By creating transaction accounts of an amount that exceeds a bank's excess reserves, even a single bank has unlimited power to affect the money supply.

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