4.7 Impact on Money Supply and Debt

Money Creation: Fractional reserve banking expands the money supply beyond the initial deposit amount through successive rounds of lending, known as the multiplier effect.

Debt Expansion: Each new loan creates additional debt in the economy, contributing to overall debt levels and potentially fueling inflation.

Systemic Risks: If banks lend out more money than they hold in reserves and depositors attempt to withdraw funds simultaneously, banks may face liquidity crises or even collapse.