Q2. “Money deposited for a term is not left in bank vaults but is loaned out by

Question

Q2. “Money deposited for a term is not left in bank vaults but is loaned out by the banks (subject to minimum reserve requirements)”. The above statement means that a dollar on deposit can flow back into the banking system one or more times and that dollar can expand the money supply.

1.What is the minimum reserve requirements referred to?

2.What terminology do economists use to refer to the process described?

3.If required reserve ratio is raised and people decide to hold more cash instead of depositing, how is the money supply affected?

Explanation / Answer

1. minimum reserve requirements is refered to the regulation by the central bank under that every bank needs to keep some % of customer depsoits in the cash rather than lened out with the central bank or in the physical form at the bank itself.

2. money creation

3. money supply will decline

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