Question

A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is

a. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money supply.

b. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money supply.

c. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply.

d. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the money supply.

Answer 1

A loan is given by the bank to Kellie's Print shop. Now, since Kellie's shop will have to return the money to the bank in future, the loan is a liability on them. The Bank on the other hand will receive the money from Kellie in the future, hence it is an assent for the bank.

Now, when the bank loans out money there will be no change in the supply of money in the economy. The supply of money increases when one deposits money in the bank.

So, the correct answer is: b. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money supply