Excess reserves are funds held by banks that exceed their required reserve ratio, which is the minimum amount they must keep on hand based on customer deposits.
Imagine you have $100 in your piggy bank, but you only need $20 for immediate use. The remaining $80 would be considered your excess reserves - money that you could potentially lend to others or invest.
Cash Reserves: Cash reserves are part of excess reserves and represent physical currency or deposits with the central bank that banks hold rather than lending out.
Loanable Funds Market: The loanable funds market refers to the interaction between borrowers (those seeking loans) and lenders (those providing loans), where excess reserves play a role in determining interest rates.
Monetary Policy: Monetary policy refers to actions taken by central banks, such as adjusting interest rates or reserve requirements, which can impact excess reserves and overall economic conditions.
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