When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has
A) a fiat supply of money.
B) money that is backed by gold.
C) a fractional reserve banking system.
D) a system of federal deposit insurance.

Question

Quizplus · Accepted Answer

The U.S. has a fractional reserve banking system, which means that banks are only required to keep a portion, or fraction, of the funds deposited by customers on reserve. The rest can be lent out to borrowers, effectively creating new money in the process. This system allows for commercial banks to expand the supply of money in the United States. A fiat supply of money (option A) means that the money is not backed by a physical commodity such as gold (option B). While the system of federal deposit insurance (option D) does help to protect depositors, it does not directly affect the expansion of the money supply.

When Commercial Banks Extend Loans, They Are Able to Expand