Fractional reserve banking refers to a system where banks:
A) Grant loans to their borrowing customers
B) Deposit a fraction of their reserves at the central bank
C) Hold only a fraction of their deposits in their reserves
D) Accept a portion of their deposits in checkable accounts

Question

Quizplus · Accepted Answer

Fractional reserve banking means that banks hold only a fraction of their deposits in their reserves, and can lend out the rest of the money to their customers in the form of loans or invest it. For example, if a bank has $100 of deposits and a reserve requirement of 10%, it must keep $10 in reserve and can lend out $90 to borrowers. This system allows for the expansion of the money supply but also increases the risk of bank runs and financial instability.

Fractional Reserve Banking Refers to a System Where Banks