A possible solution to reduce the vulnerability of the fractional banking system is
A)to create a private arrangement whereby banks agree to put their combined resources to help their members in difficult times
B)to create a central bank as a lender of last resort
C)to require all banks to invest in Treasury bills
D)all of the above
E)both a and b

Question

Quizplus · Accepted Answer

Option A could be helpful in reducing the vulnerability of fractional banking system, as it would allow banks to pool their resources and support each other during challenging times. However, this is not a comprehensive solution on its own.

Option B is a more effective choice, as a central bank can act as a lender of last resort and provide liquidity to banks that are facing a shortage of funds. This can help prevent bank runs and stabilize the financial system.

Option C is not a suitable solution, as requiring all banks to invest in Treasury bills could limit their ability to lend to other customers and generate profits. Furthermore, Treasury bills are not a foolproof investment and also have risks associated with them.

Therefore, the best choice is option E, which includes both A and B. This would allow banks to provide support to each other through a private arrangement, while also having the safety net of a central bank as a lender of last resort. This would help reduce the vulnerability of the fractional banking system and ensure financial stability.

A Possible Solution to Reduce the Vulnerability of the Fractional