The commercial banking system can lend by a multiple of its excess reserves primarily because
A) its reserves are on deposit with the Federal Reserve Banks.
B) its reserves are highly liquid assets.
C) it loses reserves when it extends credit.
D) its required reserves are fractional.

Question

Quizplus · Accepted Answer

The commercial banking system can lend by a multiple of its excess reserves primarily because its required reserves are fractional, meaning banks are only required to hold a small percentage of their deposits in reserve. This allows them to lend out the majority of their deposits and create new money through the process of loan creation. As loans are repaid, banks are able to maintain a fraction of those deposits as reserves while lending out the remaining funds again, allowing for the creation of even more money.

The Commercial Banking System Can Lend by a Multiple of Its