A Research On The Fractional Reserve Banking System Essay

1453 Words Nov 23rd, 2015 6 Pages
Do you ever wonder where your money goes after it’s deposited in the bank? Has it ever crossed your mind how banks can afford to stay open? Well, after my research on the Fractional Reserve Banking System, I’ve learned a lot about where our money goes and how banks can afford to keep their doors open. There are many different systems put in place by the Federal Reserve Market Committee such as Open Market Operations, Federal Funds Target Rate, and the Discount Target Rate. The nature of the Fractional Reserve Banking System allows banks to use their customers cash as loans to other customers in order to stimulate the economy. There are rules put in place that banks have to follow that requires them to hold a certain percentage of funds in case their customers do make withdrawals. Open Market Operations is another system used in which the central bank buys or sells government bonds in an open market to control the supply of funds and avoid higher interest rates. The Federal Reserve uses two tools called the Fed Fund Rate and the Discount Rate. Both rates play a very important part as they both help predict and control the growth, employment, and inflation in our economy.

The Fractional Reserve Banking System is a system that many countries operate under. The Federal Reserve Banking System requires banks to only keep a portion of its customer’s deposits on hand for withdrawals and it allows the remaining funds to be used as loans. When we deposit money into our savings or…

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