What is one signiﬁcant characteristic of fractional reserve banking?
A) Banks hold a fraction of their loans in reserve.
B) Banks use deposit insurance for loans to customers.
C) Bank loans will be equal to the amount of gold on deposit.
D) Banks can create money through lending their reserves.

Question

Quizplus · Accepted Answer

Fractional reserve banking allows banks to create money by lending out a portion of their reserves. This means that banks can lend out more money than they actually have in deposits. For example, if a bank has $100 in deposits and a reserve requirement of 10%, they can lend out $90 ($100 x 0.9). This process can continue multiple times, leading to a multiplication of the original deposit amount. This characteristic can lead to economic growth but can also be a source of instability in the financial system.

What Is One Signiﬁcant Characteristic of Fractional Reserve Banking