Question

Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9% to10% of deposits. What would their options be to come up with the cash?

Short answer

Selling of bonds will provide immediate cash.

Step-by-step solution

Only possible way

If banks were told they needed to boost their necessary reserves by 1%, the only option to make up the difference would be to sell certain assets, such as bonds.

Step 2:  Provide immediate cash 

As a result, selling bonds will give immediate cash that can be utilised to achieve the higher cash reserve ratio.