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An economics student provides the following explanation for how a commercial bank issues a new loan: "When a bank approves a $100,000 loan, it must first check its vault or reserve account to ensure it has $100,000 in available funds. It then transfers these funds to the borrower's account. This action creates a new loan asset for the bank, but its cash reserves decrease by the same amount, so the bank's net worth doesn't change."
Which statement below best identifies the primary error in this student's explanation?
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An economics student provides the following explanation for how a commercial bank issues a new loan: "When a bank approves a $100,000 loan, it must first check its vault or reserve account to ensure it has $100,000 in available funds. It then transfers these funds to the borrower's account. This action creates a new loan asset for the bank, but its cash reserves decrease by the same amount, so the bank's net worth doesn't change."
Which statement below best identifies the primary error in this student's explanation?
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