The Fed has just reduced the reserve requirement from 14% to 12%. Bigbux Bank holds $650 million in deposits. It will need to become more conservative with its lending procedures because it now must hold $78 million in reserves.

Question

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Reducing the reserve requirement would increase lending ability. The reserve requirement specifies the amount of reserves (vault cash or deposits with the Federal Reserve district bank) a bank must hold as a percentage of its deposits. Thus, if the reserve requirement is 12 percent, banks must hold reserves equal to 12 percent of deposits. In this case, 12 percent of $650 million is $78 million.

The Fed Has Just Reduced the Reserve Requirement from 14