Because the banking system operates using fractional reserves,
A) the money multiplier is greater than one.
B) excess reserves are equal to zero.
C) required reserves are equal to 100 percent.
D) banks can loan out only their required reserves.
E) the money multiplier must be equal to zero.

Question

Quizplus · Accepted Answer

Fractional reserves allow banks to loan out a portion of their deposits and create new money in the process. This leads to a money multiplier effect, where each dollar loaned out can potentially create several dollars of new deposits and loans. Therefore, the money multiplier is greater than one.

Because the Banking System Operates Using Fractional Reserves