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Reserve Requirement

Reserve Requirement

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Author: Colton Cranston
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This lesson covers the Reserve Requirement
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Tutorial

Notes on "Reserve Requirement"

Key Terms

M0

The narrowest definition of money, includes only the stock of physical currency.

M1

Includes demand deposits (checking account balances) + M0 (stock of physical currency).

M2

Time deposits + M1 (demand deposits + stock of physical currency).

Money Multiplier

The increase in the money supply resulting from the ability of banks to loan deposits; the value is equal to the reciprocal of the prevailing reserve ratio or 1/R, where R is the reserve ratio.

Reserves

A portion of deposits required to be held by a bank; reserves usually are kept to maintain reserve requirements, as set by the Fed.

Reserve Requirement

The required amount of depository liabilities as set by the Fed that a bank must hold, typically quoted as a percentage.