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 main finding of this strand of literature is that bank capital increases the capacity to raise uninsured forms of debt and therefore banks’ ability to limit the effect of a drop in deposits on lending.

Detailed explanation-3: -The reserve ratio is the amount of reserves-or cash deposits-that a bank must hold on to and not lend out. The greater the reserve requirement, the less money that a bank can potentially lend-but this excess cash also staves off a banking failure and shores up its balance sheet.

Detailed explanation-4: -Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.