Fractional reserve banking increases the money supply by:
A. By using deposited money to make loans without reducing the value of the deposits. When people deposit money in a bank, only a fraction of that deposit is kept in reserve (usually around 10%) while the rest can be lent out to borrowers. This process allows banks to create new money through lending, thereby increasing the overall money supply in the economy.
This means that banks can effectively "create" money by issuing loans based on the deposits they hold, leading to a multiplier effect where the initial deposit results in a larger increase in the money supply through lending.
