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How does the practice of fractional reserve banking affect banks?

A. It ensures that banks always have cash reserves equal to their total deposits.
B. It gives banks the freedom to change interest rates on loans at any time.
C. It allows banks to keep only a small percentage of their deposits in reserve.
D. It prevents banks from profiting off loans they provide with deposited funds.

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Final answer:

Fractional reserve banking is a system where banks keep only a small fraction of deposits in reserve, which could lead to risks if confidence is lost. Deposit insurance is used to prevent bank runs and failures.


Explanation:

Fractional reserve banking allows banks to keep only a small percentage of their deposits in reserve while lending out the rest. This practice is crucial for banks' operations but also poses risks if customers lose confidence, leading to bank runs and potential failures. Deposit insurance is a measure to prevent such crises and maintain trust in the banking system.


Learn more about Fractional Reserve Banking here:

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