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Required Reserves and the Deposit Multiplier definitions

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  • Money Supply
    Total amount of currency in circulation plus checking account deposits, reflecting the economy's liquid purchasing power.
  • Checking Account Deposit
    Funds placed in a bank account that can be withdrawn on demand and are included in the calculation of the money supply.
  • Reserve Ratio
    Proportion of deposits a bank must keep as reserves, typically set by government regulation, influencing lending capacity.
  • 100% Reserve Banking
    System where all deposits are held as reserves, preventing banks from lending out any portion of deposits.
  • Fractional Reserve Banking
    System where banks keep only a fraction of deposits as reserves, lending out the remainder to increase economic activity.
  • Required Reserves
    Minimum reserves a bank must legally hold, determined by multiplying the reserve ratio by total deposits.
  • Excess Reserves
    Funds held by a bank above the mandated minimum, available for lending to borrowers.
  • Asset
    Resource owned by a bank, such as cash or loans, that provides future economic benefit.
  • Liability
    Obligation of a bank, including customer deposits, that must be repaid on demand.
  • Loan
    Sum of money lent by a bank to a borrower, increasing the money supply when spent and redeposited.
  • Deposit Multiplier
    Factor showing how an initial deposit can lead to a greater total increase in the money supply through repeated lending.
  • Money Multiplier
    Value calculated as one divided by the reserve ratio, indicating the maximum potential increase in the money supply from new deposits.
  • Currency in Circulation
    Physical cash held by the public, not deposited in banks, forming part of the money supply.
  • Bank Balance Sheet
    Financial statement showing a bank's assets and liabilities, used to track reserves, loans, and deposits.
  • Government Mandate
    Official requirement, such as the reserve ratio, imposed on banks to regulate their operations and stability.