Question

Bank panics: ____________.

A. occur frequently in fractional reserve banking systems.
B. are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.
C. cannot occur in a fractional reserve banking system.
D. occur more frequently when the monetary system is backed by gold.

Answer 1

B. Are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.

Step-by-step explanation:

Fractional reserves are when a certain fraction of total deposits with the banks are reserved and the remaining amounts over and above of these reserves are loaned out and made into money supply.

Bank panics are a risk of such a system as depending on public confidence level on banks, the public may crowd out the bank and people wish to withdraw their deposits, in this case banks only have a certain amount of reserve deposits and not all the money for all the depositors.

These runs on the bank are unlikely if the banking system is prudent and abides by central banking regulations.

Hope that helps.