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What is fractional reserve banking, and how does our fractional reserve banking system allow banks to...

What is fractional reserve banking, and how does our fractional reserve banking system allow banks to ‘create’ money?

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Answer #1

Fractional-reserve banking is the process of a bank accepts deposits and produce loans and it needs to hold reserves equal to only a fraction of its deposit.

So they keep something as reserve for the money

How bank create money in fractional reserve bank?

  • There is actually not creation of money
  • They keep a fraction of money in the reserve
  • And this money is given out of loan which indeed we may think it is created by bank
  • When the bank run out of money they can seek help from commercial banks

HOPE THIS HELPS

PLEASE COMMENT OF YOU HAVE DOUBTS

THANKS

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