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Money supply

How does excess reserves does not affect the money supply ? Can u given reason with example


Swathi Krishna

Swathi Krishna

CA Inter

7K+

12-Jun-20 18:33

20

Answers (3)

Excess reserves are capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls. Excess reserves are a safety buffer of sorts. Financial firms that carry excess reserves have an extra measure of safety. Excess reserves is extra money, apart from what is in supply .


sudha reddy

sudha reddy

Moderator

13-Jun-20 12:36

But if the bank are keeping the funds in the form of excess reserves , then funds available for lending will be less, right. So as a result it will reduce money supply right.


Swathi Krishna

Swathi Krishna

CA Inter

7K+

13-Jun-20 18:57

money supply is M1, which includes money in circulation (not held in a bank) and demand deposits held inside banks. The bank receives deposits and will keep some of it on hand as required reserves, but it will loan the excess reserves out. When that loan is made, it increases the money supply. When a bank makes loans out of excess reserves, the money supply increases. But when it doesnt loan the money supply doesnt decrease. IF 100 is deposited into bank, M1 = 100 and reserves @ 20% is 20 & excess reserve is 80. If bank lends from excess reserves 50, the M1 = 50+100 (money supply increases) but if excess reserves are not lent then M1 still remains at 100.


sudha reddy

sudha reddy

Moderator

15-Jun-20 09:21