Question

How does the reserve requirements impact the banking system as a monetary policy tool, and is it used frequently? Why?

Answer 1

A reserve requirement is the minimum amount that the banks has to keep aside for every deposit they are getting. It is generally a percent of the total deposit that the bank have. IF the reserve requirement is high then the bank will have to keep a larger sum aside and that will decrease the amount they can lend, a lower reserve requirement will leave the bank with a larger sum to lend thereby increasing the money creation.

Fed uses the reserve requirement to manage the money supply but not as frequently as they use the discount rate. As banks often have excess reserve with them.