Reserve Ratio
Plain definition
The fraction of a bank's deposits that it must hold as reserves (vault cash or deposits at the central bank), expressed as a percentage.
In economics
The reserve ratio caps how much banks can lend from each deposit and therefore determines the money multiplier (1 divided by the ratio). Central banks can raise the ratio to tighten lending or lower it to encourage lending, though in practice they now rely more on interest-rate tools.
Example
With a 10% reserve ratio, a 900 after keeping 800 in new lending, contracting the potential money supply.
Common confusion
The reserve ratio is confused with the money multiplier. They are inverses: the multiplier equals 1 divided by the ratio. A lower reserve ratio means a LARGER multiplier (more money creation), not smaller.