What does the fractional reserve system entail?

The fractional reserve system is an essential concept in banking and economics, referring to the practice of banks keeping only a fraction of their customers' deposits as reserves. This means that banks are allowed to lend out a significant portion of the deposits they receive, leveraging the remaining amount to meet withdrawal demands and maintain liquidity.

By retaining only a fraction of deposits, banks can extend credit to individuals and businesses, thus stimulating economic activity. This lending process helps to create more money in the economy, as the money borrowed can be deposited again into banks, and the cycle continues, multiplying the overall money supply.

This system is fundamental for the functioning of modern banking, allowing banks to operate efficiently while managing risks associated with customer withdrawals. The other choices do not accurately describe the nature of the fractional reserve system; they either suggest full lending without reserves, focus on a different aspect of banking like digital currencies, or mention national currency limits, which are unrelated to how banks manage their reserves and loans.