In a system with fractional-reserve banking:
A) all banks must hold reserves equal to a fraction of their loans.
B) no banks can make loans.
C) the banking system completely controls the size of the money supply.
D) all banks must hold reserves equal to a fraction of their deposits.

Question

Quizplus · Accepted Answer

In a fractional-reserve banking system, banks are required to hold a certain fraction of their deposits as reserves, but they can loan out the rest. This allows for the creation of money through the process of issuing loans. Therefore, banks must hold reserves equal to a fraction of their deposits, not loans.

In a System with Fractional-Reserve Banking