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The deposit multiplier will be less than 5 if the bank decides not to loan out all that the reserve requirements would permit.
What is required reserve ratio?
The percentage of deposits that a commercial bank must retain in reserve is known as the required reserve ratio. Money that is being held in reserve cannot be borrowed or invested. The reserve requirement and reserve deposit ratio are other names for the needed reserve ratio. All American commercial banks' required reserve ratios must be established by the Federal Reserve. The statutory reserve ratio aids in ensuring that commercial banks have sufficient reserves to satisfy obligations and consumer withdrawals. Additionally, it encourages a reliable banking system.
One of the various tools the Federal Reserve employs to carry out monetary policy is the required reserve ratio. The necessary reserve ratio is a tool that the Federal Reserve can use to affect the money supply and interest rates. The required reserve ratio may be lowered by the Federal Reserve in order to expand the money supply. As a result, the money supply would expand and commercial banks would be able to loan out more money. The required reserve ratio can be increased by the Federal Reserve in order to reduce the amount of money in circulation. As a result, commercial banks would be able to lend out less money, which would lead to a fall in the money supply.
The amount lent out if the bank lends the maximum amount that a reserve ratio will permit is:
Multiplier= [tex]1/0.20=5\\[/tex]
The deposit multiplier will be less than 5 if the bank decides not to loan out all that the reserve requirements would permit.
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