The commercial banking system can lend by a multiple of its excess reserves primarily because:
A) Its reserves are on deposit with the Federal Reserve Banks
B) Its reserves are highly liquid assets
C) It loses reserves when it extends credit
D) Its required reserves are fractional

Question

Quizplus · Accepted Answer

The commercial banking system can lend by a multiple of its excess reserves primarily because its required reserves are fractional. This means that banks are only required to hold a small percentage of their deposits as reserves, which allows them to lend out the rest of the money and create new deposits. As long as they maintain the required reserve ratio set by the Federal Reserve, they can lend out funds in excess of their reserves.

The Commercial Banking System Can Lend by a Multiple of Its