Reserve Requirement

                                                       Reserve requirement

·         The Fed requires banks to always have some money readily available to meet consumers demand for cash.

·         The amount, set by the Fed, Is the required reserve ratio.

·         The required reserve rate is the percentage of demand deposits (checking account balances) that must not be loaned out.

·         Typically the required reserve ratio = 10%

                                      The three types of multiple deposit expansion question

·         Type 1: calculate the initial change in excess reserves.

-          A.k.a. the amount a single bank can loan from the initial deposit.

·         Type 2: calculate the change in loans in the banking system.

·         Type 3: calculate the change in the money supply.

*sometimes type 2 and type 3 will have the same result (i.e. no Fed involvement).

They both equal

RR and DD cannot be loaned out money stretches.