Banks retain only a small portion of their deposits on reserve in
A) a partial demand deposit arrangement.
B) a fractional reserve banking system.
C) a banking and reserve lending system.
D) a replacement reserve agreement.

Question

Quizplus · Accepted Answer

Fractional reserve banking is a system where banks keep only a fraction of their deposits as reserves, which are used to satisfy withdrawals and other demands for funds. The remainder of the deposits are used for lending and other investment activities in order to earn profits. Because banks only keep a small portion of their deposits as reserves, they are able to create new money by issuing loans and creating deposits for borrowers. This system allows for the expansion of credit and the growth of the economy, but it also creates risks for banks and the financial system as a whole.

Banks Retain Only a Small Portion of Their Deposits on Reserve