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Most modern Banking Systems are based on

Correct Answer: fractional reserves

Explanation:

Most modern banking systems are based on Fractional reserves.


 


Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank.


1. In a fractional reserve banking system banks can create money through the lending process.


2. A fractional reserve banking system is susceptible to bank panics.


3. Bank panics are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.


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