What is the banking system called where banks keep a fraction of deposits as reserves?

What is the banking system called where banks keep a fraction of deposits as reserves?

• A. Full reserve system
• B. Fractional reserve system
• C. Central banking system
• D. National reserve system

Answer: (B)

The banking system where banks keep a fraction of deposits as reserves is known as the fractional reserve system. In this system, banks are required to hold only a fraction of the depositors' money as reserves, which they can then use to lend money to borrowers or invest. This practice allows banks to create money through the lending process, as they can lend out more than the actual deposits they hold. The fractional reserve system is integral to the functioning of modern economies, as it facilitates credit expansion, supports economic growth, and enhances liquidity in financial markets. By holding only a portion of deposits in reserve, banks can offer loans to businesses and consumers, which in turn stimulates spending and investment. The full reserve system, in contrast, mandates that banks keep the entire amount of deposits on hand, limiting their ability to create loans and money supply. The central banking system refers to the national institution that manages a country’s currency, money supply, and interest rates, whereas the national reserve system typically refers to the structure and management of a country’s reserves rather than the operating model of banks.

The banking system where banks keep a fraction of deposits as reserves is known as the fractional reserve system. In this system, banks are required to hold only a fraction of the depositors' money as reserves, which they can then use to lend money to borrowers or invest. This practice allows banks to create money through the lending process, as they can lend out more than the actual deposits they hold.

The fractional reserve system is integral to the functioning of modern economies, as it facilitates credit expansion, supports economic growth, and enhances liquidity in financial markets. By holding only a portion of deposits in reserve, banks can offer loans to businesses and consumers, which in turn stimulates spending and investment.

The full reserve system, in contrast, mandates that banks keep the entire amount of deposits on hand, limiting their ability to create loans and money supply. The central banking system refers to the national institution that manages a country’s currency, money supply, and interest rates, whereas the national reserve system typically refers to the structure and management of a country’s reserves rather than the operating model of banks.