Answer to Question #214214 in Macroeconomics for Panikeke

Question

Assume the reduction in the tax rate earlier this year has already increased savings deposited by Fijians with the banks by $1 billion dollars. The banks decide to keep 20% of these new deposits as reserves

Answer 1

Solution:

Having these new deposits kept as reserve requirements is critical and a major requirement for banks, especially those holding large deposits. These reserve requirements allow the banks to ensure that they are able to meet liabilities in case of instant withdrawals or when cash is required instantly. The banks can also use the reserve requirements to increase or decrease the money supply in the economy and impact on interest rates.