The basic principle behind fractional-reserve banking is that
A) on a daily basis new deposits tend to equal withdrawals.
B) loans and investments are made with funds advanced by bank owners.
C) banks hold reserves either in the form of cash or deposits with the Federal Reserve banks.
D) a bank's assets are equal to its liabilities plus net worth.
E) there is a legal limit on the amount of reserves banks must retain against their loans.

Question

Quizplus · Accepted Answer

Fractional-reserve banking is based on the assumption that not all depositors will withdraw their money at the same time, so banks can lend a portion of their deposits while retaining a fraction as reserves. Therefore, on a daily basis, new deposits tend to equal withdrawals, allowing banks to maintain their reserve requirements and continue to lend.

The Basic Principle Behind Fractional-Reserve Banking Is That