Glossary Term

Fractional Reserve

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Fractional reserve is the most commonly practiced form of banking around the world. It is a banking mode of operation that mandates banks to withhold parts of the customers’ deposits as reserves and use another part of it for withdrawals/loans. The Federal Reserve usually sets the percentage which banks are required to keep as reserves. The higher the percentage, the less money/assets are allowed into the economy and conversely, the lower the number, the more money is pumped into the economy.

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