Question

What are reserve requirements? What happens to the money supply when the Fed raises reserve requirements?  Why don’t banks hold 100% reserves? How is the amount of reserves banks hold related to the amount of money the banking system creates?

Answer 1

If we talk in simple terms then reserve requirement is the minimum amount of money that commercial banks has to maintain according to Federal reserve(FED) guidelines

It cannot be lended

In the United States, the reserve requirements is generally 10%

The money supply is generally controlled by the Federal reserve

If there is rise in the Federal reserve requirements it means the bank will hold more money and less money will be available for the lending and there will be decrease in the money supply

As explained above the banks cannot hold 100% of reserves because the bank acts as intermediary between the lenders and the borrowers

So if it hold all the reserves then it cannot lend money and cannot generate profit or income

For the last part of the question let's clear it with an example

Let's take this reserve requirement as 10%

So bank will hold 10% of the total deposit

Here total deposit is $100