What happens in a 100-percent-reserve banking system?
A) Banks can create money by issuing currency.
B) Banks can create money by lending out reserves.
C) Banks can lend money to their customers.
D) Banks hold as many reserves as they hold deposits.

Question

Quizplus · Accepted Answer

In a 100-percent-reserve banking system, banks are required to hold as many reserves as they hold deposits. This means that banks cannot lend out money that they do not have, and thus cannot create new money through lending. Customers can still deposit money in the bank, and the bank can still lend money to its customers, but the total amount of money in circulation is limited to the amount of reserves held by the banks.

What Happens in a 100-Percent-Reserve Banking System