The banking system creates additional money by making loans equal to total reserves.
The banking system cannot lend up to total reserves because the Fed requires banks to hold some minimum reserves.

Question

Quizplus · Accepted Answer

The statement is incorrect. The banking system has the ability to create additional money through the process of fractional-reserve banking, but the amount of loans a bank can make is not limited to total reserves. The Fed does require banks to hold some minimum reserves, but this does not limit the amount of loans they can make.

The Banking System Creates Additional Money by Making Loans Equal