Which of the following is most likely to happen under a fractional reserve banking system?
A)Banks hold more reserves than deposits.
B)Banks generally lend out a majority of the funds deposited.
C)Banks cause the money supply to fall by lending out reserves.
D)Banks only accept savings deposits.

Question

Quizplus · Accepted Answer

Under a fractional reserve banking system, banks are allowed to lend out a portion of the funds deposited. This means that banks generally lend out a majority of the funds deposited and hold only a fraction of reserves. This practice increases the money supply as loans create new money. However, it also increases the risk of bank runs since banks do not hold enough reserves to cover all the deposits. Options A and C both contradict the nature of fractional reserve banking. Option D is not true as banks can accept both savings and checking deposits.

Which of the Following Is Most Likely to Happen Under