Economics study help
Hi, I need help with how the central bank regulates the amount of money circulating in the economy.
How does increasing the reserve requirements for commercial banks REDUCE the amount of money in circulation, when lending is essentially 'creating money' and increasing the money supply?
Doesn't increasing the reserve requirement just reduce the rate at which banks can lend, therefore slowing down the growth of the money supply rather than actually decreasing the money in circulation?
How does increasing the reserve requirements for commercial banks REDUCE the amount of money in circulation, when lending is essentially 'creating money' and increasing the money supply?
Doesn't increasing the reserve requirement just reduce the rate at which banks can lend, therefore slowing down the growth of the money supply rather than actually decreasing the money in circulation?
Original post by gregregregreg
Hi, I need help with how the central bank regulates the amount of money circulating in the economy.
How does increasing the reserve requirements for commercial banks REDUCE the amount of money in circulation, when lending is essentially 'creating money' and increasing the money supply?
Doesn't increasing the reserve requirement just reduce the rate at which banks can lend, therefore slowing down the growth of the money supply rather than actually decreasing the money in circulation?
How does increasing the reserve requirements for commercial banks REDUCE the amount of money in circulation, when lending is essentially 'creating money' and increasing the money supply?
Doesn't increasing the reserve requirement just reduce the rate at which banks can lend, therefore slowing down the growth of the money supply rather than actually decreasing the money in circulation?
Increasing the reserve requirement is just that!! i.e the bank has to keep a higher proportion of it’s deposits as reserves and can’t lend them out irrespective of the interest rate , which means money that can circulate in the economy is restricted.
Original post by Euapp
Increasing the reserve requirement is just that!! i.e the bank has to keep a higher proportion of it’s deposits as reserves and can’t lend them out irrespective of the interest rate , which means money that can circulate in the economy is restricted.
But the banks still increase the money supply right?
Original post by gregregregreg
But the banks still increase the money supply right?
NO!
Original post by Euapp
NO!
How do they not? Why do we learn the 'money multiplier' ? Surely with fractional reserve banking, if I deposit £1k and the bank takes this and lends out £3k, does this not increase the money supply?
Original post by gregregregreg
How do they not? Why do we learn the 'money multiplier' ? Surely with fractional reserve banking, if I deposit £1k and the bank takes this and lends out £3k, does this not increase the money supply?
If the bank has to keep higher reserves this implies that the percentage that they can loan out will be lower than it was previously able to do. Hence a smaller part of this deposit will be loaned out and redeposited elsewhere, and again loaned out, so that the multiplying effect is reduced compared to when reserves requirements were lower. Hence the money supply is lower than it would have been if reserves had been maintained at previous levels.
https://www.economicshelp.org/blog/67/money/money-multiplier-and-reserve-ratio-in-us/#:~:text=In%20theory%2C%20if%20a%20Central,therefore%20reduce%20the%20money%20supply.
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