What are the impacts of a required reserve ratio that is high ?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The impact of a required reserve ratio that is high is that it reduces the money supply in a country.  This is because the banks will have less money to lend out if the required reserve ratio is high.

A required reserve ratio is the percentage of deposits that a bank must keep on hand.  This is money that it cannot loan.  For example, let us say that the required reserve ratio is 10% and I deposit $1000 in my bank.  The bank can loan out $900 of that money, but it must keep $100 (10%) on hand.  Now imagine that the required reserve ratio is 25%.  In this case, the bank can only loan out $750 of my $1000 and much keep $250 on hand.  This will clearly reduce the bank’s ability to make loans and it will, thereby, reduce the money supply in the economy.

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