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How does the advent of fractional reserve banking change the money supply? What is the difference...

  1. How does the advent of fractional reserve banking change the money supply?
  2. What is the difference between full reserve banking and fractional reserve banking? Which is more common today? Explain.
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Answer #1

1> With the advent of the fractional reserve banking, the banks no longer need to store the full value of the deposit in their reserve, they can make loans out of the deposits made. Thus, it creates a unique way to increase the money supply in the country.

2> The difference between the full reserve banking and fractional reserve banking is that in case of full reserve banking, all the deposit is stored in the reserve of the bank. But, in case of fractional reserve, only a part of it is stored.

Fractional reserve banking is more common today. It is because the commercial banks can earn profit from the difference in the spread of the interest rate of deposit and loan. Thus, the banks have adopted this without any legal hurdle.

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