Suppose banks keep no excess reserves and no individuals or firms hold on to cash . If someone suddenly discovers $ 5 million cash in burried treasure and deposits it in a bank , what eventually will happen with the mney supply , if the required reserve ratio is 5 percent ?

Suppose banks keep no excess reserves and no individuals or firms hold on to cash . If someone suddenly discovers $ 5 million cash in burried treasure and deposits it in a bank , what eventually will happen with the mney supply , if the required reserve ratio is 5 percent ?

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter13: The Federal Reserve System

Section: Chapter Questions

Problem 5QP

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Concept explainers

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.

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Definition Definition Minimum amount that a commercial bank must hold in liquid assets in order to fulfill central bank regulations.

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