Distinguish between ‘mandatory’ and ‘prudential’ reserve ratios.
Using a simplified balance sheet, show how (a) the stock of money and (b) the
reserve ratio of the commercial banking system are affected by an expansion of
bank loans.
A mandatory reserve ratio: a ratio of reserves to customer deposits, which banks are required by law to maintain.
A prudential reserve ratio: a ratio of reserves to deposits which banks can choose for themselves in the light of thier own experience.
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