Question

1. (a) Consider a situation in which the required reserve ratio is 15 percent and
each bank individually decides to hold 5 percent of every deposit against
emergency withdrawals, in addition to the legally mandated reserves. There
is no holding of cash. If there is an open market purchase of Rs. 5,00,000,
what would be the effect on total deposits of banking system?​

Answer 1

Explanation:

Reserve requirements are the amount of cash that banks must have, in their vaults or at the closest Federal Reserve bank, in line with deposits made by their customers. Set by the Fed's board of governors, reserve requirements are one of the three main tools of monetary policy — the other two tools are open market operations and the discount rate

Reserve requirements are the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals.

Reserve requirements are a tool used by the central bank to increase or decrease money supply in the economy and influence interest rates.