economics medium True/False

Under a Fractional Reserve Banking system, commercial banks are required to keep 100% of their customers' deposits as liquid reserves in their vaults or with the central bank, preventing them from creating new credit.

  1. True
  2. False

Answer: False

Fractional reserve banking is the exact opposite; banks are only required to hold a small 'fraction' of their total deposits as reserves (dictated by the CRR and SLR). They are legally permitted to lend out the remaining vast majority of the deposits to borrowers. This lending process creates new money in the economy through the 'money multiplier' effect, which is the foundational mechanism of modern credit creation and economic expansion.

Topic Macroeconomics - Money
Exam Relevance Banking, SSC, UPSC
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