One of the basic concepts of macroeconomics is the process of money creation in the economy. Earlier, banks used to hold their entire deposits as reserves and charge a fee for the same. But they later realized that not all customers wished to withdraw their deposits at the same time and as a result the reserves were left idle for a long period of time. They started lending a part of the reserves (that is, deposits made by customers) in the form of loans and charged interest on the same. This gave them an additional source of income. Because of this, the fractional reserve banking system started gaining popularity.
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