In the simple deposit expansion model, if the required reserve ratio is 10 percent and the fed increases reserves by $100, checkable deposits can potentially expand by $1,000.
What is reserve ratio?
Simply dividing the amount of money, a bank must keep in reserve by the amount of money it has on deposit yields the required reserve ratio.
The amount of reservable liabilities that commercial banks must keep onto rather than lend out or invest is known as the reserve ratio. The central bank of the nation, in this case the Federal Reserve in the United States, sets this criterion.
What occurs when there are no reserves required?
The Fed will enhance excess reserves and, as a result, the pool of liquid assets eligible to meet supervisory requirements and expectations, dollar for dollar, by lowering reserve requirements.
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