Understanding Fractional Reserve Banking

What is the primary concept behind fractional reserve banking?

• Banks do not lend out any deposits.

• Banks create money without any deposits.

• Banks lend out a portion of deposits while keeping a fraction in reserve.

• Banks keep all deposits in reserve.

How does the monetary multiplier effect work in fractional reserve banking?

• It decreases the total money supply.

• It allows banks to keep all money in reserves.

• It multiplies the initial deposit into a larger amount in the economy.

• It prevents any money from being created.

What is a potential risk of the fractional reserve banking system?

• Banks having too much money in reserves.

• All depositors withdrawing their money at once.

• Banks only lending to one borrower.

• Banks not lending any money.

Why is government-backed insurance like FDIC important in banking?

• It ensures banks can lend more money.

• It protects depositors' money in case of a bank failure.

• It guarantees all loans are repaid.

• It allows banks to keep no reserves.

What role do stress tests play in the banking system?

• They increase the interest rates on loans.

• They simulate scenarios to ensure banks can handle financial crises.

• They reduce the amount of money banks can lend.

• They eliminate the need for reserves.