ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Reserves go down when banknotes increase. Banknotes increase when borrowers take the money they borrowed out of the bank and part or all of the money remains in cash, rather than being re-deposited in the banking system.

Detailed explanation-2: -Required and Excess Bank Reserves Banks have little incentive to maintain excess reserves because cash earns no return and may even lose value over time due to inflation. Thus, banks normally minimize their excess reserves, lending out the money to clients rather than holding it in their vaults.

Detailed explanation-3: -There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

Detailed explanation-4: -banks must keep 20 percent of each deposit and then can lend out the rest. As borrowers pay back loans, or banks get additional deposits, banks can continue to lend out money.