Reserves

The specified percentage of the deposit liabilities which banks must keep as reserves is known as the reserve ratio.  Mathematically, 

Reserve ratio = bank's required reserves / bank's demand deposit liabilities

Actual reserves = the amount of reserves a bank has

Excess reserves = actual reserves - required reserves

A single bank can only lend as much as it has in excess reserves.   Loaning money to the public increases the supply of money.

Banks can lend excess reserves to other banks on an overnight basis as a way to earn additional interest.  The interest rate paid on these overnight loans is called the Federal funds rate.  

Subscribe to our newsletter!  Enter your email address here:

Get Stock Quote: Enter Symbol(s) Symbol Lookup My Portfolio Our Privacy Vow

Like our intro movie?  Download the Short Run's screen saver.