Question

A single commercial bank in a multibank banking system can lend only an amount equal to its initial pre-loan ______________.

1. total reserves

2. excess reserves

3. total deposits

4. excess deposits

Short answer

The correct answer is b. excess reserves.

Step-by-step solution

Explanation

When a commercial bank lends money, it has to create a checkable deposit account of a receiver. It will reduce the number of excess reserve banks equal to the loan amount. This can make a bank run out of reserve, and a bank will lose its ability to lend as the bank can lend out money if it has an excess reserve.