Fractional Reserve System: Required and Excess Reserves


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question 1 of 3

When someone deposits money into a savings account, this demand deposit becomes _____ to the bank?

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1. How do banks make money?

2. A bank gets a demand deposit of $50,000. If the reserve requirement is 10%, what is the maximum the bank can loan out at this time?

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About This Quiz & Worksheet

The fractional reserve system is the basis of modern banking, and this quiz and worksheet combination will allow you to test your understanding of how it works. The quiz questions will ask you about how banks operate and the characteristics of the fractional reserve system, as well as how its effectiveness is affected by bank activity.

Quiz & Worksheet Goals

In these questions, you'll be tested on aspects of the fractional reserve system, including:

  • How banks make money
  • Determining the lending potential of a bank given its reserve requirements
  • Interpreting T-accounts
  • What happens when banks lend money

Skills Practiced

This quiz and worksheet will allow you to test your skills in the following areas:

  • Reading comprehension - ensure that you can read the lesson and draw out the most important information about the history and practice of the fractional reserve system
  • Making connections - use understanding of the concept of assets and liability to better grasp the concept of fractional banking
  • Problem solving - use acquired knowledge to solve practice problems involving excess reserves and the required reserve ratio
  • Information recall - access the knowledge you've gained regarding how banks make money

Additional Learning

To learn more about this system, review the accompanying lesson called Fractional Reserve System: Required and Excess Reserves. This economics lesson covers the following objectives:

  • Define the fractional reserve system
  • Detail the history of this system
  • Understand modern banking insofar as this system relates to it
  • Perform calculations of required reserves and money available for lending using your understanding of the fractional reserve system