Banking 3 - Fractional Reserve Banking Flashcards
1
Q
fractional reserve banking?
A
banks only keep a fraction of deposits as reserves
they loan out the rest of the deposits
2
Q
purpose of cash reserves?
A
to pay depositors in the case of withdrawal
3
Q
what is the multiplier effect?
A
money supply is exaggerated because a lot of money in circulation doesn’t exist
this is because banks only reserve a fraction and loan out the rest creating an illusion that there’s more real money than in actuality
4
Q
when does the multiplier effect occur?
A
occurs when there’s a fractional reserve banking system
