How Is It That the Banking System Is Able to Lend

question 121

Multiple Choice

How is it that the banking system is able to lend by a multiple of its excess reserves?

• A) Banks only have to hold a fraction of their deposits as reserves and can lend the rest to borrowers.
• B) Banks are required to hold only enough cash to meet the withdrawal needs of depositors.
• C) Loans can be made to borrowers.
• D) Required reserves have to be vault cash.
• E) Banks must hold their required reserves at the Federal Reserve.

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Definitions:

Initial Investment

The initial amount of money spent to start a project, purchase assets, or acquire a stake in a business venture.

Net Operating Income

A financial metric that calculates the profitability of a business's core operations, excluding the costs and returns of financial activities and one-time events.

Scrap Value

The estimated resale value of an asset at the end of its useful life, which is considered during the depreciation calculation of that asset.

Required Rate of Return

The minimum rate of return on an investment deemed acceptable by an investor, considering the investment's risk.