A decrease in the reserve ratio increases lending by banks

A decrease in the reserve ratio increases lending by banks. This is because banks have more money to lend to customers and businesses.

When the reserve ratio is lowered, banks are required to hold a smaller percentage of deposits in reserve, rather than lending them out. This means they can make more loans to individuals and companies.

As a result, the money supply increases, and economic activity tends to rise.

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The reserve ratio is a percentage of deposits that a financial institution must hold in reserve as cash, determined by the central bank.

This reserve usually consists of money a bank has and is held in its vault, as well as cash kept in the bank's account at the central bank.

In some countries, like Australia and the U.K, there are no reserve ratios, while others, such as Lebanon and Brazil, have a reserve ratio of 30% and 20% respectively.

These figures are important because they help regulate and protect each country's economy.

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The credit creation formula is a key concept in understanding how money gets multiplied in the economy.

A low cash reserve requirement (CRR) results in high credit creation.

The formula for determining total credit creation is: Total credit creation = Original deposit ✕ Credit multiplier coefficient.

The credit multiplier coefficient is calculated as 1/r, where r is the CRR.

For example, if the money deposited in a bank is ₹10,000 and the CRR is 10%, the credit multiplier coefficient is 1/0.1, which equals 10.

This results in a total credit creation of ₹100,000.

A low CRR value leads to high credit creation, while a high CRR results in low credit creation.

In the example given, a CRR of 10% results in a credit multiplier coefficient of 5, leading to a total credit creation of ₹50,000.

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A decrease in the reserve ratio increases the money supply. This is because banks are required to hold less money in reserve, which means they have more money available to lend out to customers.

Banks lend more money, and the money supply in the economy increases. As a result, businesses and individuals have more access to credit, which can stimulate economic activity.

A lower reserve ratio leads to higher potential lending, as illustrated in the table below:

This is a fundamental concept in monetary policy, and central banks can manipulate the reserve ratio to control the money supply and influence economic conditions.

A decrease in the reserve ratio increases the money supply. This is because banks are required to hold a certain percentage of deposits in reserve, and a decrease in this ratio means they can lend out more money.

With more money circulating in the economy, people and businesses have more funds to spend and invest, which can lead to increased economic activity.

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