In a fractional reserve banking systemA. bank panics cannot occur. B. the monetary system must be backed by gold. C. banks can create money through the lending process. D. the Federal Reserve has no control over the amount of money in circulation.

The correct answer is C. In a fractional reserve banking system, banks can create money through the lending process.

Explanation:

Fractional Reserve Banking is a system where banks have a fraction of the money in reserve that they do not lend. The system is dominant in most of the world. Banks operating under the fractional reserve system lend most of the money deposited and hold only a small portion of the reserve. Ten percent is common practice. This means that up to ten percent of deposits can be withdrawn before the bank goes bankrupt. This is possible in a stable financial system, where most people prefer to save by putting their money in a bank, rather than saving them themselves. The banks expect that most of the money deposited will be in the bank most of the time thereafter, since it is unlikely that all depositors will request theirs at the same time, unless a crisis should occur.

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