Question

The Proportional Reserve System requires that:

• A. Notes must be 100% gold-backed
• B. A fixed percentage of reserves be maintained against note issue
• C. Only foreign exchange be held as reserve
• D. No reserves be maintained

Answer 1

Answer:

B. A fixed percentage of reserves be maintained against note issue

In this system, the central bank must maintain a certain proportion of reserves (in gold, foreign exchange, or approved securities) relative to the currency notes issued. This ensures stability of currency while allowing some flexibility in expanding the money supply.