Asked by Eunice Monpremier on May 09, 2024
Verified
Identify the correct statement regarding a fractional reserve banking system.
A) Only a fraction of the banks in the system are allowed to create money.
B) Only a fraction of the banks in the system have reserves.
C) The claims outstanding against the bank are only a fraction of the bank's total reserves.
D) Each bank must deposit a fraction of its reserves with the Federal Reserve Bank.
E) Bank reserves represent only a fraction of bank deposits.
Fractional Reserve Banking
A banking system where banks hold a fraction of deposits as reserves and use the rest to make loans and create new money, underpinning most modern banking systems.
Federal Reserve Bank
The central banking system of the United States, responsible for regulating the nation's financial institutions and managing the country's monetary policy.
- Explain the concept of fractional reserve banking and its impact on the banking system.
Verified Answer
BN
Bridgette NicoleMay 10, 2024
Final Answer :
E
Explanation :
In a fractional reserve banking system, banks are required to keep only a fraction of their deposits as reserves while they lend out the rest, thereby creating money. Therefore, bank reserves represent only a fraction of bank deposits. Choices A, B, C, and D are incorrect statements about a fractional reserve banking system.
Learning Objectives
- Explain the concept of fractional reserve banking and its impact on the banking system.
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