PRC-3 · Chapter 17 · Question 19 of 20
Commercial banks utilize a system where they keep only a small fraction of public deposits in their vaults and lend the rest out, creating new money in the economy. This process is called:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Credit creation (The money multiplier)
Explanation
Through fractional reserve banking, commercial banks lend out deposited money, which gets redeposited and lent out again, mathematically multiplying the money supply.
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