Fractional Reserve Banking: A Closer Look

What impact does fractional reserve banking have on banks?

a) Increase liquidity
b) Generate higher profits
c) Support economic growth

Answer:

By utilizing the majority of deposits that would otherwise remain idle, banks can generate returns through interest on new loans and contribute to economic growth. Therefore, the correct answer is c) Support economic growth.

Fractional reserve banking allows banks to leverage deposits to create additional funds that can be utilized for lending purposes. This practice helps in promoting economic activities and providing financial support to businesses and individuals in need of capital. By holding only a fraction of deposits as reserves, banks are able to maximize the use of available funds without compromising stability.

Through fractional reserve banking, banks play a crucial role in stimulating economic growth by allocating resources efficiently and effectively. By generating returns from loans and investments, banks can further build their capital base and enhance their financial health.