In a 100-percent-reserve banking system,
A) banks can create money by issuing currency.
B) banks can create money by lending out reserves.
C) the Fed can increase the money supply with open-market sales.
D) banks hold as many reserves as they hold deposits.

Question

Quizplus · Accepted Answer

In a 100-percent-reserve banking system, banks are required to hold as many reserves as they hold deposits, which means they cannot create money by lending out reserves. Therefore, option D is the correct answer. Option A is incorrect because banks cannot create money by issuing currency in a 100-percent-reserve banking system. Option B is also incorrect because banks cannot create money by lending out reserves in this system. Option C is incorrect because the Fed cannot increase the money supply with open-market sales in a 100-percent-reserve banking system since banks cannot create money through lending.

In a 100-Percent-Reserve Banking System