Suppose banks have a 10% reserve requirement and hold no excess reserves. Banks have $1750 in reserves and the non-bank private sector holds $750 in currency. (A.) What is the total money supply? (B.) What happens to the total money supply if the non-bank private sector deposit $250 of their currency into the banking system?

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Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.