How does the fractional reserve requirement constrain banks in money creation?© BrainMass Inc. brainmass.com March 22, 2019, 2:31 am ad1c9bdddf
The fractional reserve requirement implies that banks keep certain amount of reserve to meet customers demand for cash and loan out the balance. For example, if the reserve requirement is, say 20%, banks will keep 20% of deposits and loan out the remaining 80%. In most countries, there is a ...
If the public hold more cash, money creation in the economy will be constrained. The money multiplier will be lower as opposed to the situation in which public deposited more money in banks instead of holding cash.