Question

A required reserve ratio of 7 percent gives rise to a simple deposit multiplier of?

Answer 1

A required reserve ratio of 7 percent gives rise to a simple deposit multiplier of 14.29.

What is reserve ratio?

The reserve ratio is the percentage of reservable liabilities which commercial banks must keep rather than lend or invest. This is a requirement set by the country's central bank, which is the Federal Reserve in the United States. It is also referred to as the cash reserve ratio.

Some key points related to reserve ratio are-

• The reserve requirement is the minimum amount of deposits that a bank must hold, and it is sometimes used interchangeably with the reserve ratio.
• Regulation D of the Federal Reserve Board establishes the reserve ratio.
• Regulation D established uniform reserve requirements with all deposit accounts with transaction accounts and necessitates banks to provide the Federal Reserve with regular reports.
• Suppose the Federal Reserve determined that the reserve ratio should be 11%. This means that if a bank has $1 billion in deposits, it must keep $110 million in reserve ($1 billion x.11 = $110 million).

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