If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent, $750 million is the maximum amount by which the money supply can be increased.
The reserve ratio is the portion of reserve liabilities that industrial banks should keep onto, rather than lend out or make investments. that is a requirement determined by the united states significant financial institution, which within the united states is the Federal Reserve. It is also called the coins reserve ratio.
The required reserve ratio can be calculated by without a doubt dividing the amount of cash a financial institution is needed to keep in reserve by the amount of money it has on deposit. For example, if a financial institution has $10 million in deposits and $500,000 are required to be held in reserve, then the desired reserve ratio could be 1/20 or 5%. For instance, allows count on that financial institution XYZ has $four hundred million in deposits. If the Federal Reserve's reserve ratio requirement is 10%, financial institution XYZ have to hold at least $forty million in an account at a Federal Reserve bank and might not use that money for lending or every other cause.
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