BANKING AFFAIRS

Detailed explanation-1: -Fractional reserve banking permits banks to use funds (i.e., the bulk of deposits) that would be otherwise unused and idle to generate returns in the form of interest rates on new loans-and to make more money available to grow the economy.

Detailed explanation-2: -Banks create new money whenever they make loans. The money that banks create isn’t the paper money that bears the seal of the Federal Reserve. It’s the electronic money that flashes up on the screen when you check your balance at an ATM. Banks can create money through the accounting they use when they make loans.

Detailed explanation-3: -Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers.

Detailed explanation-4: -An increase in demand deposits or other liabilities of a bank increases the bank’s reserves. Bank can make loans equal to its excess reserves. Loans made by increasing demand deposits. The loan check is spent, deposited in a different bank, and CLEARS.

Detailed explanation-5: -Central banks can increase the quantity of base money directly, by engaging in open market operations. However, the majority of the money supply is created by the commercial banking system in the form of bank deposits.