Which of the following is a direct result of a fractional reserve banking system?
A) The money multiplier is greater than 1.
B) Excess reserves are equal to zero.
C) Required reserves are equal to total reserves.
D) Banks can loan only their required reserves.

Question

Quizplus · Accepted Answer

A fractional reserve banking system allows banks to loan out more money than they actually have in reserves. This creates the potential for a "money multiplier" effect, where a single deposit can lead to multiple loans and increases in the money supply. Therefore, the money multiplier is greater than 1. B is incorrect because banks can hold excess reserves, which are reserves in excess of the required amount. C and D are also incorrect - required reserves are a portion of total reserves, and banks can loan out more than just their required reserves.

Which of the Following Is a Direct Result of a Fractional