Fractional reserve banking increases the money supply in an economy by:A.accepting currencies from many different countries to pay off loans.B.loaning money that would otherwise be held in a bank.C.preventing depositors from leaving a lot of money in banks.D.requiring the government to print more money in certain situations.
Question
Fractional reserve banking increases the money supply in an economy by:A.accepting currencies from many different countries to pay off loans.B.loaning money that would otherwise be held in a bank.C.preventing depositors from leaving a lot of money in banks.D.requiring the government to print more money in certain situations.
Solution
Fractional reserve banking increases the money supply in an economy by B. loaning money that would otherwise be held in a bank.
Here's a step-by-step explanation:
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When a customer deposits money into a bank, the bank keeps a fraction of that deposit as reserves and loans out the rest to other customers. This is the essence of fractional reserve banking.
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The money loaned out can then be deposited by these borrowers into the same or different banks, and the process repeats. Each time, the money supply effectively increases because the same initial deposit is being used to create new loans.
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This process can continue multiple times, leading to a significant increase in the total money supply in the economy.
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Therefore, by loaning out money that would otherwise be held in the bank, fractional reserve banking increases the money supply in an economy.
Similar Questions
How does the fractional reserve banking process add money into an economy?A.By making sure that all loans are repaid by the borrower's next paydayB.By preserving the value of deposits while loaning deposited money to othersC.By ensuring that banks maintain reserves covering all of their depositsD.By giving banks the right to print money during periods of economic emergency
How does the practice of fractional reserve banking affect banks?A.It ensures that banks always have cash reserves equal to their total deposits.B.It prevents banks from profiting off loans they provide with deposited funds.C.It gives banks the freedom to change interest rates on loans at any time.D.It allows banks to keep only a small percentage of their deposits in reserve.
Why does a country's money supply increase when banks use fractional reserve banking?A.Money deposited in banks can be used for loans instead of held in reserve.B.Foreign currency is automatically converted into the country's own currency.C.Banks are given the power to print paper money and mint coins as needed.D.Investors are not allowed to keep large sums of money in banks for long periods
Banks that practice fractional reserve banking are able to:A.lend most of the money they hold as deposits.B.return all of their deposited cash at any time.C.provide financial services to customers at no cost.D.change the interest rates on loans for any reason.
Fractional reserve banking is a term used to describe a banking system wherebyGroup of answer choicesindividual banks share a fraction of the total funds deposited in the whole banking system.banks are required to quote interest rates in fractions.banks holds reserves equal to only a fraction of their deposit liabilities.banks hold reserves equal to a multiple of their deposit liabilities; that is, fractional in this case really means multiple.banks are required to maintain a cartain fraction of their deposits in the form of checkable deposits, a certain fraction of their deposits in the form of savings deposits, etc.
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