The fractional banking system

a. makes banking more secure

b. only works if there are a limited number of banks

c. ensures growth in the economy

d. prevents excessive defaults

The fractional banking system: c. ensures growth in the economy

Banking system had a crucial role in allocating capital from the wealthy to those who need injection to sustain their business. When capital holder save their money at the bank, the bank now had the fund to provide loans for the people who do not own the capital. This mean that fractional banking system would help in improving the economy.

The correct answer is C. The fractional banking system ensures growth in the economy.

Explanation:

The fractional banking system is a banking system in which banks keep only a fraction of the amount of their customers' deposits as a reserve - either as liquid money or other documents of high liquidity - while having the obligation to return those deposits in demand, that is, in new loans for their clients.

When banks lend any fraction of the funds received in deposit or, in general, when they grant loans for a value higher than their deposits, what it allows is that, unlike the 100% reserve bank that usually charges its depositors, Fractional Reserve Banking normally pays interest, resembling investment banking more in this regard. This banking system contrasts with the so-called 100% reserve banking.

Given its operation, the system expands the amount of money in circulation. Consequently, given the prevalence of the system, the monetary aggregate of a country is generally greater than the monetary base, leading to economic growth.

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