AP Macroeconomics Question 53: Answer and Explanation

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Question: 53

3. Having a fractional reserve banking system means that

  • A. no single loan can be larger than 20 percent of the bank’s holdings
  • B. the central bank reserves the right to audit any bank at any time
  • C. the central bank holds a certain fraction of GDP on reserve at all times
  • D. the central bank must approve loans over $1 million
  • E. a bank cannot lend out all of its deposits

Correct Answer: E


E Under a fractional reserve banking system, a fraction of total deposits must be held on reserve and the rest can be lent out. This prevents a bank from lending out all of its deposits.