Question

Maria makes a deposit of $10,000 into her Smalltown Bank savings account. Smalltown Bank holds 20% of her deposit, then lends the remaining $8,000 to Ben to buy a new car. This practice of retaining only a portion of deposits on hand is called ________.
a. the gold standardb. fractional reserve bankingc. the Federal Reserve systemd. representative money

Answer 1

Answer: Fractional reserve banking

Explanation:

Fractional-reserve banking is a common form of banking that is practised by commercial banks worldwide. It involves banks in every part of the world. Fractional reserve banking is the acceptance of deposits from customers and then making loans to borrowers, while the reserve a fraction of the deposit liabilities of the bank is held.

From the question, Maria makes a deposit of $10,000 into the savings account she uses at Smalltown Bank and the bank holds 20% of the deposit she made and later lends the remaining $8,000 to another customer is an example of fractional reserve banking.