Question

Modern bankers a. expand the money supply by printing currency when they need it. b. decrease the supply of money when they extend additional loans. c. hold only a fraction of their assets in the form of reserves against their deposits. d. can increase their profits by increasing their holdings of excess reserves.

Answer 1

Answer:

The answer is: C) hold only a fraction of their assets in the form of reserves against their deposits.

Explanation:

Fractional reserve banking refers to a banking system in which banks keep as reserves only a percentage of the money their clients deposited. By doing this, banks are able to use the rest of their clients' funds to make loans and other financial operations, therefore creating "new money". For example, a client A deposits $100, the bank keeps in reserve $10, and loans $90 to a different client B. Client A's $100 have created an extra $90 in new money.