Exploring How Banks Create Money

What is the primary way banks generate profit?

• By holding customer deposits

• By charging for account maintenance

• By loaning out most of the deposits

• By investing in the stock market

What is the purpose of deposit insurance in the United States?

• To support the stock market

• To increase the money supply

• To prevent bank runs

• To ensure banks make a profit

What is the effect of a bank run?

• It increases the bank's profits

• It has no effect on the bank

• It can lead to the bank's default

• It increases the money supply

What percentage of deposits are banks required to hold as reserves in the United States?

• 10%

• 15%

• 20%

• 5%

What happens to the money supply when a bank loans out money?

• It fluctuates unpredictably

• It decreases

• It increases

• It remains the same

How much new money can be created from an initial $100 deposit, assuming a 10% reserve requirement?

• $1000

• $1100

• $1200

• $900

What is the money multiplier if the reserve requirement is 20%?

• 20

• 5

• 10

• 4

What is fractional reserve banking?

• A system where banks invest in stocks

• A system where banks keep all deposits in reserve

• A system where banks only accept fractional deposits

• A system where banks loan out a fraction of deposits

How much new money is created in the banking system from a $500 deposit with a 20% reserve requirement?

• $1000

• $2500

• $2000

• $5000

What distinguishes the new money created by bank loans from money injected by the Federal Reserve?

• It is treated as new money in the system

• It is backed by gold

• It has a different value

• It is considered virtual money