ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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When banks loan out all of their deposits and keep no reserves
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When banks are required by the FED to hold a % of their deposits in reserve
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When banks only have to hold a small % of their loans on hand
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When banks specialize in fractions
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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: -It is not required to keep all the deposits in the bank’s cash vault. Instead, banks are required to keep 10% of the deposits, i.e., $100, as reserves, and may lend out the other $900. The Federal Reserve sets the reserve requirement as one of the tools for guiding monetary policy.
Detailed explanation-3: -In fractional-reserve banking, the bank is only required to hold a portion of customer deposits on hand, freeing it to lend out the rest of the money. This system is designed to continually stimulate the supply of money available in the economy while keeping enough cash on hand to meet withdrawal requests.
Detailed explanation-4: -Cash reserve Ration (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank of a country.
Detailed explanation-5: -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.