The reserve ratio is part of the total deposit held by the bank as a reserve (ie cash in the vault). Technically, the reserve ratio can also take the deposit reserve ratio, or the proportion of deposits that banks need to reserve as reserves, or excess reserve ratios, and the proportion of deposits that banks choose to retain as a reserve that exceeds their requirements. Now that we have explored the concept definition, let’s look at a problem related to the reserve ratio. Assume that the required reserve ratio is 0.2. If an additional $20 billion reserve is injected into the banking system through open market purchases, how much is the demand deposit increased? If the required reserve ratio is 0.1, will your answer be different? First, we will check what the required reserve ratio is. The reserve ratio is the percentage of the bank deposit balance of the bank depositor at hand. Therefore, if a bank has $10 million in deposits and $1.5 million of them are deposited in banks, the bank’s reserve ratio is 15%. In most countries, banks must maintain a minimum deposit reserve ratio, the required deposit reserve ratio. This deposit reserve ratio is in place to ensure that the bank has no cash at hand to meet the withdrawal requirements. . What do banks do with the money they don’t have? They lend money to other customers! With this in mind, we can figure out what happens when the money supply increases.