Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as
Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced.” Do you agree? Explain why or why not.
6. “When a commercial bank makes loans, it creates money; when loans are repaid, money is destroyed.” Explain.
7. Suppose that Mountain Star Bank discovers that its reserves will temporarily fall slightly below those legally required. How might it temporarily remedy this situation through the Federal funds market? Now assume Mountain Star finds that its reserves will be substantially and permanently deficient. What remedy is available to this bank? (Hint: Recall your answer to question 6.)