ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Reserve requirements are the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals. Reserve requirements are a tool used by the central bank to increase or decrease the money supply in the economy and influence interest rates.

Detailed explanation-2: -The Federal Reserve requires banks and other depository institutions to hold a minimum level of reserves against their liabilities. Currently, the marginal reserve requirement equals 10 percent of a bank’s demand and checking deposits.

Detailed explanation-3: -In the U.S., the Federal Reserve dictates the amount of cash, called the reserve ratio, that each bank must maintain. Historically, the reserve rate has ranged from zero to 10% of bank deposits. Bank reserves are the minimal amounts of cash that banks are required to keep on hand in case of unexpected demand.

Detailed explanation-4: -Banks lend money to consumers depending on the percentage of their available cash. In return, the government requires the banks to retain a particular number of assets on hand to meet any withdrawals. This sum is known as the reserve requirement.

Detailed explanation-5: -The required reserve ratio can be calculated by simply dividing the amount of money a bank is required to hold in reserve by the amount of money it has on deposit. For example, if a bank has $10 million in deposits and $500, 000 are required to be held in reserve, then the required reserve ratio would be 1/20 or 5%.