In a fractional reserve banking system

Question

Quizplus · Accepted Answer

In a fractional reserve banking system, commercial banks are required to hold a certain fraction of their deposits in reserves, which means they can lend out the remaining portion of their deposits. This allows for the creation of money in the economy through the process of credit creation. Option A is incorrect because commercial banks hold their own reserves, not savings accounts in other banks. Option C is incorrect because if all deposits were held in reserves, banks would not be able to lend any money and the economy would stagnate. Option D is incorrect because commercial banks must hold reserves to ensure they have sufficient funds to meet withdrawal demands from their depositors.

In a Fractional Reserve Banking System