The Federal Reserve System, What is it? ... Reserve Requirements 2. ... The legal reserve ratio is the ratio of cash reserves to demand deposits that banks are required to maintain. ... Banks that loan out all of their excess reserves are required by the Fed to reduce loans and borrow from the Fed or from other banks with excess reserves in order to meet a higher reserve requirement. When the legal reserve ratio goes down, it increases excess reserves, which increases the lending possibility of banks. ...

• Word Count: 1833
• Approx Pages: 7
• Grade Level: High School