Reserve Ratio (Requirement)
Definition
The reserve ratio refers to the percentage of deposits that banks are required to hold as reserves, which cannot be lent out or invested.
Analogy
Imagine you have a piggy bank where you keep all your savings. The reserve ratio is like the rule that says you must keep a certain percentage of your money in the piggy bank and cannot spend it.
Related terms
Excess Reserves: The amount of reserves held by banks above the required reserve ratio.
Fractional Reserve Banking: A banking system where only a fraction of deposits is kept as reserves, allowing banks to lend out the rest.
Money Multiplier: The factor by which an initial change in reserves will ultimately increase the money supply through multiple rounds of lending.
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