In a fractional-reserve banking system,a bank
A) does not make loans.
B) does not accept deposits.
C) keeps only a fraction of its reserves in deposits.
D) keeps only a fraction of its deposits in reserve.

Question

Quizplus · Accepted Answer

In a fractional-reserve banking system, banks are required to keep only a fraction of their deposits in reserve. This means that they can lend out the rest of the money to borrowers, earning interest on those loans. This creates a multiplier effect, as the borrowers deposit the money back into the banking system, allowing the banks to lend out even more money. However, this system also creates the potential for bank runs and financial instability if too many depositors try to withdraw their funds at once.

In a Fractional-Reserve Banking System,a Bank