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Reserve Requirements and Economic Growth

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Banks fail when all depositors try to withdraw money at the same time. One way to prevent this problem would be to require banks to hold 100% of deposits on hand. Why would this not be a desirable thing to do? What would happen to the banking system? What would you expect to see happen to the cost of a checking account if banks could not make loans? What would happen to the amount of investment made by businesses? Explain.

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The amount of funds banks are required to keep on hand are called reserve requirements. Reserve requirements are one important tool the Fed uses to control the economy. It can do this because money is essentially created when the reserve ratio is lowered. If the reserve requirement is 10%, for example, a bank that receives a ...

Solution Summary

How the reserve requirement affects economic growth.