Under a fractional reserve banking system,
A)only a fraction of the banks in the system are allowed to create money
B)only a fraction of the banks in the system have reserves
C)the claims outstanding against the bank are only a fraction of the bank's total reserves
D)each bank must deposit a fraction of its reserves with the Federal Reserve Bank
E)bank reserves represent only a fraction of bank deposits

Question

Quizplus · Accepted Answer

Under a fractional reserve banking system, banks are only required to hold a fraction of their deposits in reserves, which means that bank reserves represent only a fraction of bank deposits. This allows banks to create money by lending out more than they actually have in reserves, which can lead to an expansion of the money supply.

Under a Fractional Reserve Banking System