Bank must hold reserves of $250, if it has $1,000 in checkable deposits and the reserve ratio is 25%
The reserve ratio is the minimum percentage of the central bank's specified amount that each commercial bank must set aside as required by law. The central bank has the discretion to raise or lower this ratio in response to changing economic conditions.
Banks are able to extend more loans to individuals and businesses when the reserve ratio is reduced by the Federal Reserve. This lowers the amount of cash that banks must store in reserves. The economy grows as a result, increasing the money supply in the country.
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