CLEP Principles of Macroeconomics Exam Prep

Answer - B - The fractional reserve banking system is the system in the United States in which only a portion of total deposits is reserved and the rest is lent out.

Key Takeaway: Fractional reserve banking refers to the practice by which a bank lends out most of the deposited funds and keeps the rest in a reserve. This practice is performed by all modern commercial banks and is necessary to keep the market running smoothly. Remember that the equation for the reserve ratio is the bank’s reserves divided by the bank’s total deposits.