AP Macroeconomics Question 53: Answer and Explanation
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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.