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Fractional reserve banking system

A fractional reserve banking system is a system in which commercial banks hold only a fraction of their deposits in reserve as cash, and lend out the rest.

For example, if a bank has a reserve requirement of 10%, and a customer deposits $100 into their account, the bank can lend out $90 to other customers, while keeping $10 in reserve. This allows the bank to generate new money and increase the overall money supply in the economy.

See also

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