- Demand deposits are created through the fractional reserve system.
- Fractional Reserve System
- Process in which banks hold a small portion of their deposits in reserves & loan out the excess.
- Total Reserves/Actual Reserves
- TR or AR = Required Reserves (RR) + Excess Reserves (ER)
- Required Reserves
- Cash that banks keep on hand.
- Excess Reserves
- Loans; the bank lends out.
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