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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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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.
- Spring '09