What does deposit reserve ratio mean?

The deposit reserve ratio, also known as the reserve requirement, is a regulation set by central banks that determines the amount of funds that a financial institution is required to hold in reserve, rather than lend out or invest. This ratio is set as a percentage of a bank's total deposits, and it serves as a way to ensure the stability and solvency of the banking system. By requiring banks to hold a certain percentage of their deposits in reserve, central banks can control the amount of money that is available for lending and investment in the economy. When the reserve requirement is increased, banks have less money available to lend, which can help to reduce inflation and prevent economic overheating. Conversely, when the reserve requirement is decreased, banks have more funds available for lending, which can help to stimulate economic growth. The deposit reserve ratio also plays a role in the creation of money within the banking system. When a bank receives a deposit, it is able to lend out a portion of that deposit while still keeping the required reserve in place. This creates a multiplier effect, as the funds that are lent out are eventually deposited in other banks, allowing them to lend out a portion of those funds as well. This process continues, effectively creating new money in the economy based on the initial deposit. Overall, the deposit reserve ratio is an important tool for central banks to manage the money supply, control inflation, and ensure the stability of the financial system. It is a key component of monetary policy and has a significant impact on the overall health of the economy.