Question

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that

a) the central banks follow policies that prevent reserves from falling below the level required by law.
b) reserves lost by any particular bank will be gained by some other bank.
c) the MPC of borrowers is greater than zero but less than 1.
d) the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities

Answer 1

B) reserves lost by any particular bank will be gained by some other bank.

Step-by-step explanation:

Banks "create" money when they make loans or buy securities from private parties. This money creation is the result of the money multiplier = 1 / reserve ratio.

This money creation process is not affected by which specific bank may hold the deposits, since money withdrawn from a bank will end up in another bank. The money multiplier applies to the whole banking system, not just an individual bank or group of banks.