In the fractional reserve banking system

Question

Quizplus · Accepted Answer

In the fractional reserve banking system, banks are required to hold only a fraction of their liabilities as reserves to meet withdrawals at any one time. This means that they can use the remaining funds to create loans and increase the money supply. Therefore, option B is the correct statement. Option A is not fully correct as it implies that only a fraction of bank assets are used to create money, whereas it is a fraction of liabilities. Option C is incorrect as it does not accurately describe how the reserve system works. Option D includes all options, but only option B is correct.

In the Fractional Reserve Banking System