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Reserve Ratio Formula:
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The Reserve Ratio is a banking regulation that sets the minimum reserves each bank must hold against customer deposits. It is expressed as a percentage of deposits that banks are required to keep as reserves, either in their vaults or on deposit at the central bank.
The calculator uses the Reserve Ratio formula:
Where:
Explanation: The reserve ratio indicates what percentage of deposits a bank must keep as reserves and cannot lend out. This ratio helps ensure banks maintain adequate liquidity.
Details: The reserve ratio is crucial for banking stability, monetary policy implementation, and controlling money supply in the economy. It prevents bank runs and ensures financial system stability.
Tips: Enter reserves and deposits in the same currency units. Both values must be positive numbers. The calculator will provide results in both decimal and percentage formats.
Q1: What is the typical reserve ratio set by central banks?
A: Reserve ratios vary by country and economic conditions, typically ranging from 0% to 10% of deposits, with many central banks setting requirements between 1-3%.
Q2: How does reserve ratio affect money supply?
A: Higher reserve ratios reduce the money multiplier effect, limiting banks' ability to create new loans and thus contracting money supply. Lower ratios have the opposite effect.
Q3: What's the difference between required and excess reserves?
A: Required reserves are the minimum amount banks must hold by regulation. Excess reserves are any additional reserves held above the required minimum.
Q4: Do all countries use reserve requirements?
A: Most countries use reserve requirements, though some (like Canada, UK, Australia) have moved to zero reserve requirements, relying on other regulatory tools.
Q5: How often do reserve requirements change?
A: Central banks adjust reserve requirements periodically as part of monetary policy, typically during economic shifts to either stimulate or cool down the economy.