The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of
reserves to the banking system as a whole.

Question

Quizplus · Accepted Answer

When a bank lends out its excess reserves, those reserves are transferred to the borrower's account in another bank. The lending bank's reserves decrease, but the receiving bank's reserves increase by the same amount, overall leaving the banking system with the same amount of reserves. This allows banks to continue lending and increasing the money supply beyond their initial excess reserves.

The Banking System Can Lend by a Multiple of Its