What is the reserve ratio?

What is the reserve ratio?

• A. The central bank's control over the money supply.
• B. The amount of currency banks keep as reserves with the Federal Reserve.
• C. The fraction of bank deposits that a bank holds as reserves.
• D. The ratio of total deposits to total loans in the banking system.

Answer: (C)

Reserve ratio is the fraction of bank deposits that a bank holds as reserves. Reserves include cash in the vault plus deposits at the central bank. This portion isn’t lent out, so it limits how much money the banking system can create from deposits through the lending process. For example, with a 10% reserve ratio, a $100 deposit allows $90 to be lent, and that loan, when spent and deposited again, continues the cycle but with a portion always kept in reserve. Banks hold reserves to meet withdrawals and regulatory requirements, with the central bank often setting a minimum reserve ratio and banks sometimes holding extra as excess reserves. The other descriptions point to different ideas: monetary policy is about controlling the money supply directly; the exact amount kept at the Federal Reserve is only part of reserves; and the ratio of deposits to loans is a separate metric.

Reserve ratio is the fraction of bank deposits that a bank holds as reserves. Reserves include cash in the vault plus deposits at the central bank. This portion isn’t lent out, so it limits how much money the banking system can create from deposits through the lending process. For example, with a 10% reserve ratio, a $100 deposit allows $90 to be lent, and that loan, when spent and deposited again, continues the cycle but with a portion always kept in reserve. Banks hold reserves to meet withdrawals and regulatory requirements, with the central bank often setting a minimum reserve ratio and banks sometimes holding extra as excess reserves. The other descriptions point to different ideas: monetary policy is about controlling the money supply directly; the exact amount kept at the Federal Reserve is only part of reserves; and the ratio of deposits to loans is a separate metric.