If fractional reserve banking exists, then:
A) banks need only keep a portion of each deposit on hand.
B) the money multiplier is equal to 1.
C) money cannot be created in the economy through banks.
D) lending would be curtailed to nearly zero.

Question

Quizplus · Accepted Answer

Fractional reserve banking allows banks to keep only a portion of each deposit on hand, typically around 10%. The rest can be lent out to borrowers, thereby creating new money in the economy. This is due to the money multiplier effect, which allows for multiple loans to be made based on the initial deposit. If banks were required to keep all deposits on hand, lending would be severely limited and the money multiplier would be equal to 1, meaning no new money would be created.

If Fractional Reserve Banking Exists, Then