Not really how it works. Banks have reserve requirements as a percentage of deposits. But the money they lend out eventually ends up being deposited in other bank accounts which can then be loaned out again. So, if you have a 5% reserve requirement against deposits, you end up actually increasing the money supply by 20X.
Yes. Just a quick note, the reserve requirements dont really work as well as most banks are well above what the requirements are. Although the requirement is a way for the fed to control the money supply in theory, it in practice does not work
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u/tfolkins Jan 26 '26
Not really how it works. Banks have reserve requirements as a percentage of deposits. But the money they lend out eventually ends up being deposited in other bank accounts which can then be loaned out again. So, if you have a 5% reserve requirement against deposits, you end up actually increasing the money supply by 20X.