Suppose that in a country people had no access to banks but used currency.The creation of a fractional reserve banking system with a reserve ratio of less than 100% would cause the money supply to
A)increase.The central bank could reduce the size of this increase by buying bonds.
B)increase.The central bank could reduce the size of this increase by selling bonds.
C)decrease.The central bank could reduce the size of this decrease by buying bonds.
D)decrease.The central bank could reduce the size of this decrease by selling bonds.

Question

Quizplus · Accepted Answer

A fractional reserve banking system allows banks to lend out a portion of deposits, increasing the money supply. The central bank can reduce this increase by selling bonds, which takes money out of circulation.

Suppose That in a Country People Had No Access to Banks