What is one signiﬁcant consequence of fractional reserve banking?
A) Banks are vulnerable to "panics" or "bank runs."
B) Banks can only lend an amount equal to their deposits.
C) Banks hold a portion of their deposits in gold.
D) Banks can serve the withdrawals of all their depositors.

Question

Quizplus · Accepted Answer

Fractional reserve banking allows banks to lend out more money than they have in deposits. This creates a situation where if a large number of depositors decide to withdraw their money at the same time, the bank may not have enough cash on hand to satisfy all the requests. This can lead to a panic or bank run where depositors rush to withdraw their money, potentially causing the bank to fail.

What Is One Signiﬁcant Consequence of Fractional Reserve Banking