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D 1r r thus by varying r given a relatively stable

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Unformatted text preview: sired) ratio of cash reserves to deposits (r ) times the quantity of bank reserves (R ) outstanding, where R is comprised of notes and coin plus bank deposits held on reserve at the central bank. D (1/r) R. Thus, by varying R, given a relatively stable reserve ratio (r ), the central bank can directly affect D, the quantity of deposits or inside money that, as just noted, is a large component of the money supply. Even if not required to do so by regulation, banks would still tend to hold some cash reserves as a liquidity precaution against the sudden withdrawal of deposits or the sudden arrival of new loan demand. sau86198_ch01.qxd 14 Part One 4/21/02 8:52 PM Page 14 Introduction of the money supply and its transmission more predictable. Such reserves also add to an FI’s net regulatory burden if they are more than the institution believes are necessary for its own liquidity purposes. In general, whether banks or insurance companies, all FIs would choose to hold some cash reserves—even noninterest bearing—to meet the liquidity and transaction needs o...
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