Which of the following statements is correct?
A) In the special case of 100-percent-reserve banking,the reserve ratio is 1,the money multiplier is 2,and banks create money.
B) In the special case of 100-percent-reserve banking,the reserve ratio is 1,the money multiplier is 1,and banks do not create money.
C) When the reserve ratio is 0.5,then the money multiplier is 1 and banks do not create money.
D) When the reserve ratio is 0.125,then the money multiplier is 8,and each bank loans $8 for every $1 that it accept in deposits.

Question

Quizplus · Accepted Answer

In the special case of 100-percent-reserve banking, banks do not create money as the reserve ratio is 1 and the money multiplier is 1. In this case, banks must hold 100% of deposits as reserves and cannot make loans or create new money from deposits.

Which of the Following Statements Is Correct