In a fractional reserve banking system,

Question

Quizplus · Accepted Answer

In a fractional reserve banking system, banks keep only a fraction of deposits in cash (or reserves), typically around 10% to 15%. The rest of the deposits are used to make loans, which in turn create new deposits in the banking system. This system allows banks to earn interest on the loans they make and expand the money supply, but it also increases the risk of bank runs or panics if too many depositors try to withdraw their money at once. Therefore, choice C is the correct answer as it describes the fundamental characteristic of a fractional reserve banking system. Choices A, B, D, and E are incorrect as they do not accurately reflect the working of such a system.

In a Fractional Reserve Banking System