The banking system is able to make new loans equal to
A) total legal reserves of the system.
B) total excess reserves of the system.
C) total required reserves of the system.
D) a multiple of total excess reserves of the system.

Question

Quizplus · Accepted Answer

The banking system is able to create new loans through the process of fractional reserve banking, which allows banks to lend out a multiple of their excess reserves. This multiple is determined by the reserve requirement set by the central bank. Therefore, the correct option is D, which states that the banking system is able to make new loans equal to a multiple of total excess reserves of the system.

The Banking System Is Able to Make New Loans Equal