If a bank's required reserves increase due to a rise in the reserve requirement set by the Federal Reserve, what immediate impact might this have on the bank's lending capacity?

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Seekh · Accepted Answer

If the Fed raises the reserve requirement, banks must hold more money in reserve, so the amount of excess reserves they can use for loans shrinks. This reduces the bank’s available lending capital, making it harder to issue new loans. As a result, the supply of credit can fall and interest rates may rise to compensate for the tighter lending. For example, if a bank with $100 million in deposits must raise reserves from 10 % to 12 %, it can lend only $78 million instead of $90 million, leaving $12 million less for new loans. Thus the bank’s immediate lending capacity is lowered by the increase in required reserves.

If a bank's required reserves increase due to a rise in the reserve requirement set by the Federal Reserve, what immediate impact might this have on the bank's lending capacity?

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