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Why bank reserves important ?
2- I heard that bank reserves can Change interest rates , how bank reserves change interest rates ?

Thanks in advance .

Bank reserves are important for 2 reasons.  First, they ensure that banks keep enough money on-hand to fulfill withdrawal requests.  In other words, when you put money into a bank, the bank lends that money out as loans.  That's how banks earn their money.  If they lend too much, though, they will not have enough when people withdrawal their money.  So they keep enough on hand to ensure they can handle withdrawals.  The second reason bank reserves are important is because they are one tool of monetary policy that control the amount of money in circulation in the economy - the money supply.  When bank reserves requirement increase, then banks are keeping more money stashed-away, then that money is being distributed (spent or lent), so there's less money in circulation.  When bank reserve requirements decrease, then more money is in circulation.  This can play an influence on interest rates because when bank reserve decrease then the banks have more money to lend, which allows them to charge less interest to generate higher revenues by attracting more borrowers.  When bank reserve requirements increase, that can put pressure on banks to raise interest rates in order to make enough revenues while making fewer loans.  Note, that the bank reserve requirements, by themselves, will not necessarily change interest rates, but they will put pressure on the banks to change them.


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Michael Taillard


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Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

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