Chapter 15.2, Problem 4R

To determine

To evaluate: The benefit to a bank of fractional reserves.

Explanation of Solution

Advantages of fractional reserves are:

1. Most of the times people are not interested to spend or lend enough for optimum growth. Since loans are not limited by savings, fractional reserves are offering far higher investment rates.
2. Fractional reserves are making deposits less of a bank risk. So they can afford to give you a checking account and pay you more money or charge less interest on savings accounts.
3. Since investment needs capital up front but can produce substantial and sustainable returns over very long periods of time, banks play a chief part in transforming maturities. Surely making capital up front helps in this process.

Economics Concept Introduction

Introduction: A structure in which only a proportion of deposits of the banks are backed up and accessible in real cash on hand for withdrawal is called Fractional reserve banking. Presumably, it is done by freeing up lending capital to stimulate the economy.