What happens when someone pays his debt in a fractional-reserve banking system?
What happens when someone pays his debt in a fractional-reserve banking system? Is only his past debt subtracted from the reserve or also all subsequent debts that was loaned to other people with his initial debt? For instance, a person A borrows 100$ then it becomes part of the reserve, then a person B can borrows from his deposit 80$, then a person C 64$, given a reserve requirement of 10% for banks. A: I think you have it backwards. When person A borrows $100, it does not become part of the reserve. But I understand your real question. Say the bank gets a deposit of $100. The reserve requirement says that for each $100 it has in deposits, it can issue X dollars in loans. So a $100 deposit increases its ability to make loans by $X. Now suppose it has already loaned out all that it is allowed to. If a borrower repays the loan, the bank has less outstanding than it is allowed to, and so can loan that money out again. Now suppose a depositor wants his money back. Now the bank has less m
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