The reserve ratio is too powerful to be changed very often because a small change is magnified throughout the banking system
The reserve ratio is the percentage of deposits that a bank is required to hold in reserve, rather than lending out or investing. It is a key tool that central banks use to influence the money supply and credit conditions in the economy. Because the reserve ratio is a percentage of deposits, a small change in this ratio can have a significant impact on the amount of money that banks have available to lend.
If the reserve ratio is increased, banks will be required to hold more of their deposits in reserve, which means they will have less money available to lend. This can tighten credit conditions and reduce the economic money supply. Conversely, if the ratio is decreased, banks will hold less of their deposits in reserve, which means they will have more money available to lend. This can loosen credit conditions and increase the money supply in the economy.
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