The Required Reserve Ratio (RRR)
This is a portion (which is usually described as a percentage) of a depositor’s balances that must be held by the bank in cash.
Let’s say the required reserve ratio was 10% in my country. I went into the bank with 100 dollars to deposit. The bank will take those dollars but must hold 10 dollars back in cash. The bank cannot lend those 10 dollars out. That is determined by the RRR.
Changing the RRR is used governments and central banks to either increase or decrease bank lending. This typically has the effect of kick starting or slowing down an economy respectively.
Note: Since China reduced their Required Reserve Ratio last week (2.20.12), the Shanghai Index (their stock market) has rallied (moved up in price) every single day for a week.
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