legal Reserve Requirements

In modem banking bank resents are held either as cash on band or as deposits with the central bank. A prudent banker; concerned only with assuring customers that the bank has enough cash for daily transactions. might choose to keep 5 percent of.the bank’s checking deposits in reserves. In fact, banks today set aside about If) pe~nt o( their deposits in reserves, These are held’ in Casals or in. deposits with our central bank, the Federal Reserve System, often called “the Fed.”

The main function of legal reserve requirements is to enable the Federal Reserve to control the amount of checking deposits that banks can create. By posing high fixed’ legal reserve requirements, the Fed can better control the money Supply.

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