It is correct and required by law, being mandated by the central bank. Banks will have to keep some reserve so that they will meet demand deposits and other on demand transaction. E.g if I deposit my money today at a commercial bank, given that it is not some type of interest earning account (saving), I will likely go back to the ATM or line up at the bank to withdraw it when I want to use it or if any emergency occurs. So If commercial banks uses the money for their business or give all away for borrowers, the public will not have any M1 money left to withdraw. I don't know if that answered your question, but I hope it helps.

thats what I thought - its been 3 years, help?

@@MCart1215 No; fractional reserve banking is commercial banks deciding to lend out a large proportion of the money that is deposited with them as savings. For example, if I save $10 in an HSBC bank account, HSBC may choose to lend $7 out of that $10 out. However, that $10 is created by the government, not the commercial bank. In other words, commercial banks don't control the money supply because they can't print money. They can only decide how much to lend out, which is fractional reserve banking.

@@tusharmehra7272 But that $7 will circulate and come back into deposits surely? Whats the point in the 'money multiplier' equation?

@@MCart1215 But how does your point mean that commercial banks control the economy's money supply?

@@tusharmehra7272 not necessarily control but don’t they increase it?

hem in quantitative easing they add money to their balance sheet before purchasing those bonds

no only the Bank of England controls the money supply.

@@maday9425 so I don’t understand what the money multiplier is fir