AP MacroeconomicsMoney & Monetary Policy
Excess Reserves
Excess reserves are the funds a bank holds above its required reserves, which are available to lend out.
Banks create new money by lending excess reserves, which drives the money multiplier process. The central bank can change excess reserves through open market operations. When banks hold large excess reserves, the multiplier weakens.
Formula / Example
Excess reserves = Total reserves − Required reserves.
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