Everything else held constant, a decrease in the required reserve ratio on checkable deposits means a decrease in the money supply.
What is reserve ratio?
- Simply dividing the amount of money a bank must keep in reserve by the amount of money it has on deposit yields the required reserve ratio.
- The amount of reservable liabilities that commercial banks must keep onto rather than lend out or invest is known as the reserve ratio.
- The central bank of the nation, in this case the Federal Reserve in the United States, sets this criterion. It is often referred to as the ratio of cash reserves.
- The percentage of deposits that authorities mandate a bank maintain in reserves and refrain from lending out is known as the mandated reserve ratio.
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