In a fractional reserve banking system, which of the following statements correctly describe what banks do?

Introduction / Context:
Most modern economies operate under a fractional reserve banking system. In this system, commercial banks do not hold one hundred percent of customer deposits as cash in their vaults. Instead, they keep only a fraction as reserves and lend out the rest, thereby creating additional money in the economy. This question checks whether you understand the basic activities of banks within a fractional reserve framework, including accepting deposits, holding reserves and extending loans to borrowers.

Given Data / Assumptions:
- The context is a fractional reserve banking system. - Options describe accepting deposits, making some loans and holding some cash reserves. - We assume a standard commercial banking environment regulated by a central bank. - We must determine which statements accurately describe bank behaviour in this system.

Concept / Approach:
In fractional reserve banking, banks perform three key functions. First, they accept deposits from individuals, firms and government entities, offering safekeeping and transaction services. Second, they are required by regulation to maintain a fraction of those deposits as reserves, either as vault cash or balances at the central bank. Third, they lend the remaining deposit funds to borrowers in the form of loans, overdrafts and credit facilities. These loans create new deposit balances, which is why fractional reserve banking is central to money creation. All three statements given in the options are therefore correct descriptions of what banks do in this system.

Step-by-Step Solution:
Step 1: Consider option A. Banks clearly accept deposits; this is their basic function, so option A is correct. Step 2: Consider option B. Banks do not keep all deposits idle. They extend loans by using a portion of the deposited funds, subject to reserve requirements, so making loans is also correct. Step 3: Consider option C. Fractional reserve banking means banks hold only a fraction of deposits in reserve, not the full amount, so this statement is also accurate. Step 4: Since options A, B and C are all correct features of a fractional reserve system, option D, which states that all of the above are true, is the best overall answer.

Verification / Alternative check:
Standard money and banking textbooks describe the deposit expansion process using a simple example. A customer deposits money, the bank keeps a required reserve ratio, and the remainder is lent out. That loan becomes a new deposit somewhere else, and the process repeats. This story assumes that banks accept deposits, keep some part in reserve and make loans with the remainder. This pattern confirms that each of the statements in options A, B and C is a genuine feature of fractional reserve banking.

Why Other Options Are Wrong:
Banks accept deposits only: This ignores the lending function, which is essential to fractional reserve banking. Banks only hold reserves and do not lend: That would describe full reserve banking, which is not how modern systems typically operate. Banks only make loans without holding reserves: This would be unsafe and illegal, since reserve requirements and liquidity regulations exist to protect depositors.

Common Pitfalls:
A common misconception is that banks simply lend out exactly the deposits they receive in a one to one relationship. In reality, the interplay between deposits, reserves and loans allows the banking system as a whole to create a multiple expansion of deposits. Another pitfall is confusing fractional reserve banking with a system where no reserves are required. Even in a fractional reserve framework, regulators enforce minimum reserve ratios and liquidity norms. Remember that the word fractional does not mean zero; it means a part of deposits is held as reserves, not the entire amount.

Final Answer:
The correct option is All of the above statements are true in a fractional reserve system, because fractional reserve banking involves accepting deposits, holding a fraction as reserves and making loans with the remainder.