ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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banks must provide high interest rates
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banks must pay a certain percent in taxes
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banks must keep a certain percent of deposits on hand
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banks must get government approval for all loans
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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: -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: -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-4: -The fractional reserve banking system legally permits banks to hold less than 100% of their deposits as a reserve.
Detailed explanation-5: -In the United States banks operate under the fractional reserve system. This means that the law requires banks to keep a percentage of their deposits as reserves in the form of vault cash or as deposits with the nearest Federal Reserve Bank. They loaned out the rest of their deposits to earn interest.