Legal Reserve Requirements.

We have mentioned that banks are required to hold a minimum amount as non-interest-bearing reserves. Table 26-3 shows’ current reserve requirements along with the Fed’s discretionary power to change reserve requirements. The key concept is the level of required  ratios. They range from 10 percent against check able deposits down to zero for personal savings accounts. . For convenience in our numerical examples, we use 10 percent reserve ratios, with the understanding that the actual ratio may differ from 10 percent from time to time.

Put differently, high reserve requirements ensure that banks will want to hold just that legal minimum. The supply of bank money will then be determined by the supply of bank reserves (determined by the Fed through open-market operations) and by the money-supply multiplier (determined by the required reserve ratio). Because the Fed controls both bank reserves and the required reserve ratio, it has (within a small margin of error) control over the money supply.

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