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