Question

An individual bank can safely lend an amount equal to its excess reserves, but a commercial banking system can lend _____.

A.by a multiple of its collective excess reserves
B. an amount equal to its total demand deposits
C. only an amount equal to one-half its required reserves held in the Federal Reserve banks
D. based on the size of its customer base

Answer 1

In a commercial banking system, banks can lend by a multiple of their collective excess reserves. This is due to the money multiplier effect.

Step-by-step explanation:

In a commercial banking system, banks can lend by a multiple of their collective excess reserves. This is because when banks hold excess reserves, they have the ability to loan out a multiple of that amount based on their reserve requirements.

For example, if a bank has $10 million in excess reserves and the reserve requirement is 10%, the bank can potentially lend out up to $100 million (10 times the excess reserves). This is due to the money multiplier effect, where loans made by one bank can be re-deposited in other banks and create additional loans and money in the economy.