AP MacroeconomicsMoney & Monetary Policy
Fractional Reserve Banking
Fractional reserve banking is a system in which banks hold only a fraction of deposits as reserves and lend out the rest.
By lending excess reserves, banks create new money, expanding the money supply through the money multiplier. The fraction held is set by the required reserve ratio. The system assumes that not all depositors withdraw at the same time.
Interactive graph
Money Market →
Drag the curves and see it for yourself.
Study module
Monetary Policy →
Full lesson, practice questions, and flashcards.