The banking system can lend the sum of its excess reserves because

Question

Quizplus · Accepted Answer

Banks are required to keep only a fraction of deposits on reserve which means they can lend out the excess reserves they hold. This is the basis of fractional reserve banking system. Thus, option A is the correct choice. Option B is incorrect because it talks about bank assets and liabilities without any relation to excess reserves. Option C is incorrect because required reserves are not a leakage but a mandatory reserve a bank must keep. Option D is incorrect because the money multiplier is greater than 1 as it measures the amount of money the banking system can create from each dollar of reserves.

The Banking System Can Lend the Sum of Its Excess