Question

In a fractional-reserve banking system, banks create money because:
A) each dollar of reserves generates many dollars of demand deposits.
B) banks have the legal authority to issue new currency.
C) funds are transferred from households wishing to save to firms wishing to borrow.
D) the wealth of the economy expands when borrowers undertake new debt obligations.

Answer 1

Answer:

A) each dollar of reserves generates many dollars of demand deposits.  

Explanation:

Fractional reserve is a banking arrangement in which only a fraction of bank deposits are backed by actual cash-on-hand which is available for withdrawal, so that it can be loaned to other entities. Thus, all fractional reserve banks keep reserves equal to a fraction of their deposits and create money when they make loans.