Which of the following correctly describes fractional reserve banking?
A) The federal government only insures a fraction of the deposits at most banks.
B) Banks keep a fraction of their loans with other banks to maintain the quality of their loan portfolio.
C) Banks can loan out all but a small fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults.
D) Banks can loan out all but a fraction of its own money, and all but a fraction of all money deposited at the bank.

Question

Quizplus · Accepted Answer

Fractional reserve banking is when banks keep only a fraction of their deposits on reserve (in vaults or at the central bank) and are able to lend out the rest. This means that they can loan out all but a fraction of their own money, and all but a fraction of all money deposited at the bank. The specific fraction that banks are required to hold in reserve varies by country and by central bank regulation.

Which of the Following Correctly Describes Fractional Reserve Banking