TeachMeFinance.com - explain reserves
reserves -- (1) that portion of current earnings set aside to take care of possible future losses or for other specified purposes. (2) the portion of deposits in transaction accounts that must be held by depository institutions in liquid form (vault cash or deposits in a Federal Reserve Bank). Such reserves may not be used for lending or investing. The reserve ratio for transaction accounts or nonpersonal time deposits in all depository institutions (including commercial banks, savings banks, savings and loan associations and credit unions) is set by the Board of Governors of the Federal Reserve System. A lower reserve requirement allows more expansion of deposit and loan volume, while a higher reserve ratio permits less economic expansion. That is because the lower the required reserve ratio, the greater the portion of deposits that can be lent, redeposited somewhere else, and lent again thus multiplying each dollar of the original deposit.
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