Question

Statement (1): The process of credit creation is directly related to the size of money multiplier.

Statement (2): If legal reserve ratio is 20%, the value of money multiplier will be 10.

विकल्प

• Both statements are true.

• Both statements are false.

• Statement 1 is true but Statement 2 is false.

• Statement 2 is true but Statement 1 is false.

Answer 1

Statement 1 is true but Statement 2 is false.

Explanation:

• Statement (1): Credit creation is directly related to the money multiplier, as total credit is created by multiplying initial deposits by this factor. A larger multiplier naturally increases the banking system's ability to generate more credit.
• Statement (2): The money multiplier is computed as 1/LRR. With a legal reserve ratio of 20% (0.2), the multiplier equals exactly 5 (1/0.2), not 10.