Reserve Requirements for Price and Financial Stability – Essay Example
The paper "Reserve Requirements for Price and Financial Stability" is an excellent example of a business essay.
An increase in the required reserve ratio from 4% to 7% means that banks will be required to hold more money in their reserves. There will be less money available to be given out as loans to businesses, as well as in the economy (Walsh 2012). The results will be banks increasing their interest rates to get the same returns on a smaller investment. The increase in interest rates will impact the costs of all businesses that take out loans from banks. Also, businesses will have to compete more against themselves to get loans from banks (Walsh 2012).
The change in the required reserve ratio will affect the business strategic options, business price levels as well as price levels in the economy. The increase in the required reserve ratio of 3% will lead to increased interest rates, as explained earlier. The increased interest rates directly impact business costs, resulting in an increase in the shop’s price to customers (Walsh 2012). The increase in the print shop’s products will cause a leftward shift in the supply curve, thereby increasing the price of all products. A leftward shift of the supply curve will translate to the shop’s inability to supply at a given price as a result of an increase in the cost of a given quantity. Price levels in the economy will also increase as other businesses will be experiencing the same decrease in money supply from banks, leading to increased cost of business.
The change in interest rates, as a result of changes in required reserve ratio, will impact the print shop’s borrowing decision either negatively or positively. For instance, increased required reserve ratio by 3% will lead to an increase in interest which will translate to decreased liquidity. Thus print shop will have to compete with other businesses to get loans (Walsh 2012). Also, the cost of business, as well as the price of business’ products, will increase. On the other hand, a decrease in interest rates will favor print shop to borrow more from the banks (Walsh 2012).