If the Bank's reserve ratio is 25%, this means that the banks will hold 25% of the deposits in their vaults. i.e 25% of $200 million = $50 million. as a result, the cash balances in the economy will increase to $550 million pushing the money supply in the economy upwards. Additionally, this could increase further if the banks generated loans through the deposits that they receive as this helps them lend even what they do not have.
Aug 13th, 2014
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