A bank manager tells you that she doesn't create money. She just lends the money that people deposit. Explain why she is wrong. The bank manager is wrong because ______. A. the more currency her customers deposit, the greater the incentive for the Fed to authorize her bank to create loans B. when her customers deposit currency in the bank, the quantity of money increases by the amount of the new deposit C. every new loan creates a new deposit, and a new deposit is new money D. in addition to loaning out the money that people deposit, she also lends what her bank receives from the Fed

Through the manager does not see the entire process, nonetheless the loans the manager makes create more deposits and more money. When she makes a loan, the deposits at her bank initially increase. And, when the loan is spent, the recipient selling the goods or services that have been purchased will deposit part or all of the proceeds in her bank. When the recipient makes this deposit, the total amount of the nation's deposits increase and, because deposits are part of the nation's money, the quantity of money also increases. However, actions of other economic agents also affect the creation of money. E.g. if people decide to hold less currency and more deposits, the immediate effect on the quantity of money is nil. But over time the quantity of money increases because banks gain more excess reserves, which are then loaned and then deposited, thereby creating additional deposits and increasing the quantity of money.