Suppose a commercial bank has checkable deposits of $20,000 and the reserve ratio is 20 percent. The Fed then raises the reserve ratio to 25 percent. What is the effect on the bank's required and excess reserves, assuming its actual reserves are initially $5000?
Explanation
Raising the reserve ratio is a tool of restrictive monetary policy. It forces banks to hold a larger percentage of their deposits as required reserves, which reduces their excess reserves and constrains their ability to create money through lending.
Other questions
According to the text, what is the primary determinant of the amount of money demanded for transactions?
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The total demand for money curve is derived by:
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What is the Federal Open Market Committee's (FOMC) role in monetary policy?
If a commercial bank borrows from a Federal Reserve Bank, what happens to its reserves?
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