Question

Bank runs:_______ a. will affect neither the money supply nor the money multiplier. b. are a problem because banks only hold a fraction of deposits as reserves. c. increase the money supply. d. can be neither prevented nor mitigated by the Federal Reserve.

Answer 1

Bank runs are a problem because banks only hold a fraction of deposits as reserves.

Option B is correct

Explanation:

Fractional reserve banking is a banking system that includes only a percentage of the deposit made by its customers. This enables them to make loans with the remainder and thus effectively create new money. This allows commercial banks to control the money supply directly.

Nevertheless, while central banks control the money supply, commercial banks raise the bulk of the money in contemporary economies by fractional reserve banking.