Reserve requirements would be classified as a tool of monetary policy used by the federal reserve.
Commercial banks are required by the Federal Reserve (Fed) to keep a portion of customer deposits in their possession. Reserves are the sums that the banks hold. The amount of deposits that must be held as reserves is determined by the Fed. This percentage may be changed by the Fed to meet its monetary goals.
Commercial banks maintain a larger amount of deposits that they lend out by lowering the reserve requirements percentage. It implies that banks will extend more loans to clients. The economy gains more money when lending increases. Reducing the reserve requirement expands the nation's money supply.
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