Bank Reserves are banks that hold currency and deposits in accounts with their central bank or the Federal Reserve. These reserves are essentially held in bank vaults also called cash vaults. All banks hold required reserves due to the reserve requirements set by the Federal Reserve. Banks hold additional reserves, called excess reserves which banks use to meet its obligations when funds are withdrawn, either by a depositor or when a check is written on an account.
The reserve requirements set by the Fed enforces the banks to maintain a certain percentage of their reserves. Therefore, their reserve total will fluctuate depending on the account balance. For instance, let’s say a bank has received a deposit of $100.00. They are obligated to hold $10.00 as required reserves and the remaining $90.00 would be held as excess reserves. The Fed can increase or lower the required reserve percentage depending upon the situation with the economy.
This percentage of required reserves will dictate how much money banks can create or have available for loans or investments. If the reserve requirement is raised, banks will have less money to loan and if it’s lowered, banks will have more money to loan. Both of these instances will alter the amount of money banks have on hand called, money supply.
The reserved money is used to process check and payments and other unexpected cash flows banks may incur. If for some reason a bank experiences large withdrawals from their depositor’s and their reserve balance is not enough to cover its obligation to pay, the bank will then borrow from the Federal Reserve System. This could be a result of a bank not ha...
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So, essentially, money has three functions which are, medium of exchange where money is exchanged for payment of goods and services, unit of account which measures the value of goods and services and store value which saves the purchasing power from the time money is received to when it is spent.
Bottom line, money is very important and it can be measured more than just a dollar amount that one carry’s around in their wallet or purse.
As a result of this class I not only learned what I previously wrote but also how interest rates are determined, what causes fluctuations, inflation, foreign exchange transactions, supply, demand, value of money, the structure of the financial market and how it operates. There is so much to learn about the financial markets which help us understand why our economy operates that way it does. This was an awesome class.
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