BANKING AFFAIRS

Detailed explanation-1: -Banks can loan customers the money it has on deposit, minus the reserve requirement. A dollar bill represents an obligation of the government to provide a commodity of value to you. Generally speaking, when interest rates are high more credit is accessible and the economy tends to grow quickly.

Detailed explanation-2: -The Federal Reserve requires banks and other depository institutions to hold a minimum level of reserves against their liabilities. Currently, the marginal reserve requirement equals 10 percent of a bank’s demand and checking deposits.

Detailed explanation-3: -banks must keep 20 percent of each deposit and then can lend out the rest. As borrowers pay back loans, or banks get additional deposits, banks can continue to lend out money.

Detailed explanation-4: -The government introduced the reserve requirements to help protect depositors’ funds from being invested in risky investments. For example, if a person deposits $1, 000 in a bank account, the bank cannot lend out all the money. It is not required to keep all the deposits in the bank’s cash vault.