In April 2011, the money supply was estimated to be 52 million hurls. At the same time, bank reserves were 6.24 million hurls and the reserve requirement was 12 percent. The banking industry, being “loaned up,” lobbied the Congress to cut the reserve ratio. The Congress yielded and cut required reserves to 10 percent. What is the impact on the money supply?

From my calculation, a decrease in the required reserve ratio would mean that the reserves of 6.24 million will support 62.4 million hurl. Does this means that the money supply increases by 10.4 million?


closed as off-topic by EnergyNumbers, Ganesh Sittampalam, Ubiquitous, user218, Corone Nov 23 '14 at 14:35

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    $\begingroup$ To answer a real world question there is insufficient information. April 2011 banks are not reserve constrained anyway in most major economies. Also are they paying interest on reserve balance? How well capitalised are the banks? $\endgroup$ – Corone Nov 23 '14 at 10:35

Theoretically, reducing the required reserve ratio will increase the money supply by allowing banks to produce more loans and keep less in reserve. Theoretically your simple (ie basic homework) calculation would show that the money supply could increase by that amount. In practice there are of course many other factors, such as the interest rate, velocity and reliablility of the people taking out the loans.


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