Economics Monetary Policy Questions
The reserve requirement refers to the percentage of deposits that banks are required to hold as reserves. It is set by the central bank as a tool to control the money supply in the economy. When the reserve requirement is increased, banks are required to hold a larger portion of their deposits as reserves, which reduces the amount of money available for lending and decreases the money supply. Conversely, when the reserve requirement is decreased, banks are required to hold a smaller portion of their deposits as reserves, allowing them to lend out more money and increasing the money supply. Therefore, changes in the reserve requirement directly impact the money supply in the economy.