If the required reserve ratio is 0.03, currency in circulation is $ billion, deposits are $ billion, and excess reserves are $1 billion, then the money multiplier is equal to (1+(600/1000))/(0.03+(1/1000)+(600/1000)).
The reserve ratio is the portion of reservable liabilities that commercial banks ought to preserve, in preference to lend out or invest. that is a requirement determined with the aid of the united states' central financial institution, which in the united states is the Federal Reserve. it's also known as the cash reserve ratio.
The desired reserve ratio may be calculated by simply dividing the amount of cash a financial institution is needed to keep in reserve by way of the amount of money it has on deposit. as an example, if a financial institution has $10 million in deposits and $500,000 are required to be held in reserve, then the specified reserve ratio would be 1/20 or 5%.
For instance, allow's anticipate that bank XYZ has $four hundred million in deposits. If the Federal Reserve's reserve ratio requirement is 10%, bank XYZ must hold at least $forty million in an account at a Federal Reserve financial institution and won't use that money for lending or any other motive.
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