ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending.

Detailed explanation-2: -Under a fractional reserve system, banks are required to keep a portion of their total deposits in the form of legal reserves. Banking with fractional reserves results in a monetary expansion process that increases the total money supply available to the public.

Detailed explanation-3: -Fractional Reserve Banking and How It Works Fractional reserve banking is a system where banks are only required to keep a fraction of bank deposits on hand. That means your bank holds a percentage of your money, lending the rest of it out or investing the money to grow their total available funds.

Detailed explanation-4: -The Federal Reserve uses the reserve ratio as one of its key monetary policy tools. The Fed may choose to lower the reserve ratio to increase the money supply in the economy. A lower reserve ratio requirement gives banks more money to lend, at lower interest rates, which makes borrowing more attractive to customers.

Detailed explanation-5: -This amount is called the reserve requirement, and it is the rate that banks must keep in reserve and are not allowed to lend. The Federal Reserve’s Board of Governors sets the requirement as well as the interest rate banks get paid on excess reserves.