Most free-market banking systems are based on __________ reserves.

The correct answer is fractional reserves. In most free-market banking systems, banks operate on a fractional reserve system which allows them to keep only a fraction of their total deposits as reserves and lend out the remainder. This practice enhances the availability of credit in the economy, leading to increased investment and economic growth. By lending out a portion of deposits, banks can create money through the loans they issue, which multiplies the initial amount of reserves they hold.

This system contrasts with a full reserve banking system, where banks would need to keep all deposits on hand as reserves, thereby limiting their ability to create credit. The elastic reserve concept, while it can relate to how banks manage savings and loans, does not accurately describe the basic mechanic of fractional reserves. Fixed reserves do not reflect the nature of modern banking where reserves can fluctuate based on lending and deposits. Thus, the fractional reserve system is integral to how most banks operate within a free-market economy, facilitating broader economic activity.