ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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%.

Detailed explanation-2: -The ”reserve requirement ratio” (RRR) or cash reserve ratio (CRR) is the percentage of customer deposits and other liquid assets that commercial banks must store, within it’s own institution or with the central bank.

Detailed explanation-3: -These changes can lead to increase in money supply. For example, assume the entire banking system has $1000 in deposits and the required reserve ratio is 10% and banks are fully loaned up. That means the total reserve in the banking system is $100.

Detailed explanation-4: -If the reserve requirement is 10%, the deposit multiplier means that banks must keep 10% of all deposits in reserve, but they can create money and stimulate economic activity by lending out the other 90%. So, if someone deposits $100, the bank must keep $10 in reserve but can lend out $90.