Question

A commercial bank’s ability to create money depends on which of the following? A. The existence...

A commercial bank’s ability to create money depends on which of the following?
  • A. The existence of a central bank
  • B. A fractional reserve banking system
  • C. Gold or silver reserves backing up the currency
  • D. A large national debt
  • E. The existence of both checking accounts and savings accounts
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Answer #1

A fractional reserve banking system is a system which allows a commercial bank to keep a fraction of its total Checkable deposits as Reserves and the rest of them to loan out. This Ability of loaning out and creating money of a commercial bank is due to Fractional Reserve banking system. if there is no fractional reserve banking system then the commercial banks have to keep all of their checkable deposits as Reserves and then will not be able to loan out anything and they will not be able to create money.

Hence commercial banks ability to create money depends on a fractional reserve banking system.

Therefore, option B is correct.

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