#1
What is fractional reserve banking?
A banking system where banks hold a fraction of their deposits in reserve
ExplanationBanking system with reserves held fractionally.
#2
What is the term for the minimum amount of reserves that a bank must hold?
Required reserves
ExplanationMinimum reserves banks must hold.
#3
In a fractional reserve banking system, what is the primary function of the central bank?
To control the money supply
ExplanationPrimary role: controlling money supply.
#4
What is the reserve ratio in fractional reserve banking?
The ratio of reserves to total deposits
ExplanationRatio of reserves to deposits.
#5
How does fractional reserve banking contribute to the money supply?
By increasing the money supply
ExplanationContributes to increasing money supply.
#6
What is the term for the process by which banks create money through lending beyond their reserves?
Credit expansion
ExplanationMoney creation through lending.
#7
What happens to the money supply if the reserve ratio is increased?
Money supply decreases
ExplanationDecrease in money supply.
#8
What is the term for the interest rate at which commercial banks can borrow reserves from the central bank?
Discount rate
ExplanationInterest rate for bank reserves borrowing.
#9
What is the term for the ratio of a bank's reserves to its total deposits?
Reserve-to-deposit ratio
ExplanationRatio of bank reserves to deposits.
#10
What is the term for the maximum amount of money that can be created through the money multiplier?
Money supply limit
ExplanationMaximum money creation limit.
#11
How does the central bank influence the money supply in a fractional reserve banking system?
By controlling the reserve ratio
ExplanationControls money supply via reserve ratio.
#12
In fractional reserve banking, what is the relationship between the reserve ratio and the money multiplier?
They are inversely related
ExplanationInverse relationship between ratio and multiplier.
#13
How does a decrease in the discount rate affect the money supply?
Increases the money supply
ExplanationDecrease in rate boosts money supply.
#14
In the context of fractional reserve banking, what does the term 'money multiplier' refer to?
The factor by which the money supply increases due to an initial deposit
ExplanationFactor increasing money supply from deposit.
#15
What is the primary tool used by central banks to implement monetary policy in a fractional reserve banking system?
Open market operations
ExplanationPrimary tool: open market operations.