Question

The fractional reserve system allows the Federal Reserve to:

Answer 1

B. create extra deposit money

Answer 2

The correct answer is C.

The fractional reserve system consists on the establishment of a reserve ratio. This ratio is expressed as a percentage/fraction of the total amount of deposits held by the bank and it sets that such proportion of all deposits has to be backed by money in cash, ready if customers come to the bank. The rest of the money deposited can be used to issue loans to third parties, and this is how the banking system creates money, by channelling funds from saver's deposits to loan demandants.