Social Science (087) — AI-generated practice question

Banks keep only about 5% of deposits as cash because not all depositors withdraw money at the same time. On any given day, only a small number of depositors need cash, so this reserve is sufficient to meet daily withdrawal demands. Banks lend out the remaining deposits and earn income from the interest charged.

However, this becomes a serious problem if all depositors rush to withdraw their money simultaneously. In such a situation, the small cash reserve would be completely inadequate, and the bank would be unable to honour all withdrawal requests, potentially causing it to collapse.

Source: Money and Credit, Chapter 3 (Loan Activities of Banks)

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• The textbook directly raises the question: "What would happen if all depositors went to ask for their money at the same time?" — your answer must address this.
• Key terms to use: cash reserve (5%), provision, manage withdrawals, bank run (concept, even if not named).
• Examiners look for: (1) why it normally works — staggered withdrawals, and (2) the exceptional risk — simultaneous mass withdrawal. Both parts must be present for full marks.