Imagine a crude banking system based on a reserve of 100 gold coins,with circulating paper deposit claims on 500 gold coins.This situation is sustainable if,among other things,merchants ________ accept paper claims on gold as payment for their goods,and gold coins withdrawn from the banking system are ________ the system.

Question

Quizplus · Accepted Answer

Option A states that merchants will accept paper claims on gold as payment and gold coins withdrawn from the system will be returned to the system, which is essential for the sustainability of the system. Option B is incorrect because if gold coins are kept out of the system, it will reduce the reserve and eventually lead to a collapse of the system. Option C is also incorrect because if gold coins withdrawn from the system are not returned, it will reduce the reserve and eventually lead to a collapse of the system. Option D is incorrect because if gold coins are kept out of the system, it will reduce the reserve and eventually lead to a collapse of the system.

Imagine a Crude Banking System Based on a Reserve of 100