What are Reserves?
- Reserves are the fraction of deposit liabilities that banks hold to meet depositor withdrawals.
How Do I Remember It?
- Think of reserves as a “safety net” for banks. It’s like having a reserve fund to ensure that banks can meet depositor demands for withdrawals.
Real World Example
- If a bank has $100 million in deposits, and the reserve requirement set by the central bank is 10%, the bank would need to hold $10 million in reserves. This means that the bank can lend out the remaining $90 million to borrowers while still meeting its reserve requirement.
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