Under fractional reserve banking:
A) banks only need to keep a portion of each deposit on hand.
B) the money multiplier is equal to 1.
C) banks cannot create money in the economy.
D) lending would be curtailed to nearly zero.

Question

Quizplus · Accepted Answer

Fractional reserve banking allows banks to only keep a portion of each deposit on hand, typically between 10-20%. The remaining funds can be used for lending and investing, which generates interest income for the bank. This system allows for the creation of new money in the economy through loans, resulting in a money multiplier greater than 1. Therefore, A is the correct choice. B and C are incorrect as the money multiplier is greater than 1 and banks are able to create money. D is also incorrect as lending is a key function of banks under this system.

Under Fractional Reserve Banking