Question

When banks have less money in required reserves they lend more money out to people and business. So Lower reserves usually help do what to the economy?

Answer 1

Answer:

Lower reserves increase the money supply in the economy.

Banks can either keep deposits in reserves or give them out as loans.

the lower the reserve ratio, the higher the money multiplier and the higher the money supply.

Lowering the reserves can be a form of expansionary monetary policy

Explanation:

Fractional banking is a banking system where a portion of customer's deposits is kept as reserves while remaining portion is lent out. The amount kept as reserves is determined by the required reserve ratio set by the Central bank.

If the required reserve ratio is 10% and $100 is deposited, reserves would be $10 and $90 would be lent out

Increase in the total value of checkable deposit is determined by the money multiplier

Money multiplier = 1 / reserve requirement

Increase in value of total deposit = amount deposited / reserve requirement

Assume 100 is deposited in a bank and the reserve requirement is 10%

Increase in value of total deposit = 100 / 0.1 = 1000

Imagine that the reserve is reduced to 5%

Increase in value of total deposit = 100 / 0.05 = 2000

reducing the reserve requirement increased the value of total deposit and thus the money supply in the economy