An important effect of fractional reserve banking is that:

Question

Quizplus · Accepted Answer

Fractional reserve banking allows banks to hold only a fraction of deposits as reserves and lend out the rest. Therefore, the amount of loans extended by banks is influenced by the bankers' choices about how much to lend, which in turn affects the money supply. This makes Choice A the correct answer. Choices B and C are incorrect because banks do not have complete control over total reserves as they are subject to government regulations, and banks do not always turn every dollar of excess reserves into loans. Choice D is incorrect because a new bank deposit does not necessarily allow a bank to extend loans of the same amount to borrowers as it depends on various factors such as the reserve requirement and the demand for loans.

An Important Effect of Fractional Reserve Banking Is That