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In a fractional banking system, banks must first receive deposits from customers, which serve as the basis for their lending capacity. The reserve requirement, set by the central bank, dictates the minimum percentage of deposits that must be held in reserve. Before the amount of money loaned out can increase, banks must either attract more deposits or reduce their reserve ratio, allowing them to lend a greater proportion of their deposits. Additionally, an increase in demand for loans can also stimulate banks to lend more.

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1d ago

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