Question

Under a fractional reserve banking system, the amount of money loaned out can only increase if what happens?

A. Taxes are reduced.
B. The money supply increases.
C. There are more government bonds for sale.
D. The required reserve ratio is lowered.

Answer 1

In a fractional reserve banking system, the amount of money that can be loaned out increases when the required reserve ratio is lowered, allowing banks to have more money available for lending.

Step-by-step explanation:

Under a fractional reserve banking system, the amount of money loaned out can only increase if the required reserve ratio is lowered. Reserve requirements are the percentage of deposits that banks are legally required to hold either as cash in their vault or on deposit with the central bank. When the reserve requirement is lowered, banks are allowed to hold a smaller amount in reserves, which means they will have a greater amount of money available to lend out. Conversely, an increase in reserve requirements would mean more money is held in banks, reducing the supply of money circulating in the economy.

Answer 2

In a fractional reserve banking system, loan amounts can increase if the reserve ratio is lowered, allowing banks to lend out more money.

Step-by-step explanation:

Under a fractional reserve banking system, the amount of money that can be loaned out is directly related to the reserve requirements set by the central bank. These requirements determine what fraction of customer deposits must be kept in reserve. Therefore, the correct answer to the student's question is that the amount of money loaned out can only increase if D. The required reserve ratio is lowered. This is because when the central bank lowers the reserve requirement, banks have more money available to lend out, which in turn increases the money supply.