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Explain the term Reserve Ratio. What is its significance for the Money Supply? Provide an example....

Explain the term Reserve Ratio. What is its significance for the Money Supply? Provide an example.

Non-plagarized, each answer to question has to be 2 paragraphs and the paragraphs have to be 250 words with APA in text citations and reference page that is also APA format

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Answer #1

The reserve ratio is the portion of depositors balances that banks must have on hand as cash.

A decrease in the ratio will allow banks to lend more and hence increase the money supply in thw economy through multiplier effect and increase in reserve ratio will have opposite effect.

For eg. Lets assume that banks have $400 million in its deposit. And FED reserve ratio requirement is 10% then banks have to keep atleAtl $40 million in account at federal reserve bank and may not use that cash for lending or any other purpose

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