If the public holds part of money in cash and rest in checking accounts, change in the reserve requirement from 16 percent to 8 percent, the money supply will increase by less than double.
Money supply refers to the total of cash coins and bank account balances in circulation. Through monetary policy, money supply is determined by the central bank.
Reserve requirements refer to the amount that must be hold by commercial banks for ensuring that it must be able to meet the liabilities in case of sudden withdrawals.
Therefore, lowering the reserve requirement ratio from 16 percent to 8 percent by central bank, the money supply will increase by less than double.
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