Understanding Money Creation by Banks

What is the primary reason banks do not loan out all of their deposits?

• To invest in stock markets for higher returns

• To comply with government regulations on profit margins

• To prevent bank runs by keeping some money available for withdrawals

• To ensure they have enough money to pay interest to depositors

In fractional reserve banking, what is the term for the portion of deposits that banks are required to hold and not loan out?

• Loanable funds

• Required reserves

• Capital reserves

• Excess reserves

If a bank has a reserve requirement of 10% and receives a deposit of $100, how much can it loan out?

• $90

• $10

• $100

• $110

How is the money multiplier calculated?

• By adding the required reserves to the excess reserves

• By taking the inverse of the reserve ratio

• By multiplying the reserve ratio by the total deposits

• By dividing the total money supply by the initial deposit

What happens when the Federal Reserve buys bonds?

• The money supply increases

• The money supply remains unchanged

• The money supply decreases

• The reserve requirement is lowered