Consider the following statements:1.Full-reserve banking is the banking system under which banks that take demand deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers.2.Under full-reserve banking, banks act as custodians to depositors’ money and may charge a fee from depositors for the service of safekeeping that they offer to the depositors.Select the correct statements using the codes given below:

Q. Consider the following statements:
1.Full-reserve banking is the banking system under which banks that take demand deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers.
2.Under full-reserve banking, banks act as custodians to depositors’ money and may charge a fee from depositors for the service of safekeeping that they offer to the depositors.
Select the correct statements using the codes given below:

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: B

Notes:

Explanation –

Statement 1 is incorrect. Full-reserve banking also known as 100% reserve banking refers to a system of banking where banks are not allowed to lend out money that they receive from customers in the form of demand deposits.

Statement 2 is correct. Under full-reserve banking, banks act as custodians to depositors’ money and may charge a fee from depositors for the service of safekeeping that they offer to the depositors.

Source: ForumIAS

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