How do reserve requirements set by central banks influence the monetary policy and regulation of commercial banks?

Reserve requirements are rules set by central banks that determine how much money commercial banks must keep on hand and not lend out. When a central bank raises reserve requirements, banks have to hold more money in reserve, which means they can lend less. This can lead to a decrease in the money supply in the economy, making it harder for people and businesses to borrow money. For example, if a bank has to keep 10% of its deposits as reserves, it can only lend out 90% of those deposits. By adjusting these requirements, central banks can influence interest rates and overall economic activity, helping to control inflation and ensure financial stability.