Question

Assume that the Kenyan economy is in a recession, how can the monetary authorities use the required reserve ratio to boost economic performance?                                                                       

Answer 1

The Kenyan monetary authorities can decrease the required reserve ratio for the banks so that these banks can lend out more loans. When the required reserve ratio is less, the banks obviously need not hold on to more money (i.e. the reserved money) and they lend out the excess money which is above the required reserve ratio. This in turn increases the money supply in the economy and thus stimulates or boosts the economy. More money enters the market, implies more is the consumption. Therefore the price levels increase and the economy comes out of recession. This is the way in which monetary authorities leverage required reserve ratio to improve the economic performance.

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