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Published on Dec 1, 2011
The reserve requirements set the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks. The reserve requirement can affect monetary policy, because the higher the reserve requirement is set, the less money banks will have to loan out, leading to lower money creation, and maintaining the purchasing power of the currency previously in use. The effect is exponential, because money that is loaned out can be re-deposited; a portion of that money may again be re-loaned, and so on. To watch the full episode of Capital Account with Lauren Lyster check out http://youtube.com/capitalaccount Follow Lauren on Twitter: https://twitter.com/laurenlyster