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Which of the following best describes a fractional reserve banking system?

A. A banking system in which banks keep a portion of deposits on hand to satisfy their customers' demands for withdrawals.
B. A banking system in which a large portion of the bank's assets are digital money rather than bills and coins.
C. A banking system in which net worth is calculated by subtracting a fraction of liabilities from assets.
D. A banking system in which banks have only partial control over the interest rates they charge on loans.

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Final answer:

Fractional reserve banking involves banks keeping only a fraction of total deposits as cash on hand while lending out the rest, enabling credit expansion but risking bank runs if confidence is lost.


Explanation:

Fractional reserve banking system is a banking system in which banks keep only a fraction of total deposits as cash on hand to meet withdrawal demands while lending out the rest of the deposits as loans. This practice allows banks to create credit and expand the money supply, but also poses the risk of bank runs if depositors lose confidence in the bank's ability to meet withdrawals.


Learn more about Fractional reserve banking here:

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