Asked by Matias Morales on May 19, 2024
Verified
The fractional reserve characteristic of the banking system allows banks to create money and also create wealth from bank deposits. Describe why this statement is or is not true.
Fractional Reserve
A banking system in which only a fraction of bank deposits are backed by actual cash on hand, with the rest being available for loans.
Banking System
The network of banks and financial institutions that provide financial services to consumers, businesses, and other banks.
- Analyze the importance of bank reserves, the effect of the money multiplier, and how the implementation of fractional reserve banking impacts money supply fluctuations.
Verified Answer
JA
Jassy ArantonMay 25, 2024
Final Answer :
This statement is not true.
Banks can create money through the multiplier effect. However, bank deposits do not increase wealth in the economy. This is because every deposit in a bank results in an offsetting increase in liabilities within the economy. Although bank deposits can lead to money creation, wealth remains unchanged.
Banks can create money through the multiplier effect. However, bank deposits do not increase wealth in the economy. This is because every deposit in a bank results in an offsetting increase in liabilities within the economy. Although bank deposits can lead to money creation, wealth remains unchanged.
Learning Objectives
- Analyze the importance of bank reserves, the effect of the money multiplier, and how the implementation of fractional reserve banking impacts money supply fluctuations.