How Do Reserve Requirements Impact Monetary Policy?
Reserve requirements are a powerful tool in the central bank's arsenal for controlling the money supply and influencing economic conditions. By raising or lowering reserve requirements, central banks can control the amount of money that banks can create through lending. This, in turn, affects economic growth, inflation, and employment rates. For instance, higher reserve requirements can help cool down an overheating economy, while lower reserve requirements can stimulate economic activity during a downturn.