AP MacroeconomicsMoney & Monetary Policy
Required Reserve Ratio
The required reserve ratio is the fraction of deposits that banks must hold in reserve rather than lend out.
Set by the central bank, a lower ratio lets banks lend more, increasing the money multiplier and the money supply. Raising the ratio is contractionary. It is one of the central bank's monetary policy tools.
Formula / Example
Money multiplier = 1 ÷ required reserve ratio.
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Study module
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