What is the purpose of the required reserve ratio?

Accounting Dec 17, 2020

Expert Solution

In order to accommodate the needs of depositors to make withdrawals, there must be enough money on hand so that the depositors can use it in day-to-day operations. The reserve ratio is set by the national bank to avoid a run on the banks by making sure that they do not end up turning their customers away because they cannot comply with their need to withdraw their funds. This reserve is important as the FDIC insures every account in a bank up to $250,000.

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