{10.11 (b)(ii)} Explain briefly the process of deposit contraction/*(creation)* resulting from increasing/*(decreasing)* the required reserve ratio. (4m)
{10.11 (b)(ii)} An increase in the reserve ratio (1) Insufficient required reserves (1) Banks have to call back loans (1) Withdrawals of deposits from borrowers to repay loans which cause a further withdrawal of deposits from the banking system (1) The process will go on and on until the actual reserve is equal to the required reserve. (1)
An decrease in the reserve ratio (1) Excess reserves (1) Banks do not keep excess reserves and loans them out (1) The public redeposits the loans into the banking system and deposits increase further (1) The process will go on and on until the actual reserve is equal to the required reserve. (1)