Banks create money in:
A) a 100-percent-reserve banking system but not in a fractional-reserve banking system.
B) a fractional-reserve banking system but not in a 100-percent-reserve banking system.
C) both a 100-percent-reserve banking system and a fractional-reserve banking system.
D) neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

Question

Quizplus · Accepted Answer

Banks create money through the process of fractional reserve banking, where they hold only a fraction of the deposits they receive and lend out the rest, creating new money in the process. In a 100-percent-reserve banking system, banks would not be able to create money in this way as they would be required to hold all deposits in reserve.

Banks Create Money In