Question

What is true about banks in a fractional reserve banking system? a. Banks must deposit all cash from depositors with the Federal Reserve. b. Banks can lend all of the deposits that are received. c. Banks have to deposit all cash from depositors in their own bank vault. d. Banks face the risk of not having enough cash to meet withdrawal needs. e. Banks have to purchase gold that has the value of the deposits received.

Answer 1

Answer:

d.

Explanation:

A fractional reserve banking system allows the bank to keep only a part of the fund with them and lend out the rest of it. Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. In this system, there is a greater risk for bank of facing a situation where they might not have enough cash to meet withdrawal needs. Thus, option d. is correct.