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Question
If legal reserve ratio is 20%, the value of money multiplier would be ______.
Options
2
3
5
4
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Solution
If legal reserve ratio is 20%, the value of money multiplier would be 5.
Explanation:
The money multiplier is calculated as the reciprocal of the legal reserve ratio (LRR). The formula is:
Money Multiplier = `1/"legal Reserve Ratio"`
If the legal reserve ratio is 20%, the money multiplier is:
Money Multiplier = `1/0.20 = 5`
Thus, the value of the money multiplier would be 5.
RELATED QUESTIONS
Define Credit Multiplier.
The ______ creation is called credit creation.
What do you mean by credit creation by commercial banks?
Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India's best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy amongst the rural populace have been some of the key challenges.
The most vulnerable communities, who often had no formal credit history or ability to provide collateral, have often been the worst affected. Inability to access loans from banks meant that the poorest had to resort to moneylenders for loans at unreasonably high rates of interest that invariably led them into a toxic debt trap.
In this context, the SHG-Bank Linkage programme, formalised by the National Bank for Agriculture and Rural Development (NABARD) in 1995, synthesizes 'formal financial systems' (in terms of a formal institution providing credit) with the 'informal sector' (comprising of rural poor with no formal credit history), has emerged as a preferred vehicle for providing financial services to the hitherto unbanked poor.
Community Based Repayment Mechanisms (CBRMs) have been institutionalised at branches involved in financing SHGs to monitor and ensure timely repayment of loans by SHGs. The number of SHGs with outstanding bank loans stands at nearly 5 million today, implying that the program has brought formal banking services to over 50 million women.
There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option.
Assertion (A): Micro-credit can help empower women and make them financially independent.
Reason (R): Micro-credit involves small loans provided at reasonable interest rates that can help people start their own ventures.
Read the given extract carefully and answer the following questions.
| Mr. X wanted to buy an expensive motorcycle for his son but he did not have sufficient money to buy it. He approached a public sector commercial bank for the loan. The bank asked Mr. X to deposit 20% cash of the loan amount and rest 80% of the loan amount was given by the bank. |
- Briefly explain a Commercial Bank.
- What is the regulation of consumer credit in selective credit control?
- Name the bank which controls all the commercial banks and financial institutions in the country.
Explain briefly the process of credit creation by commercial banks.
How money multiplier is related to Legal Reserve Ratio?
A T-account shows that a ₹10,000 cash deposit increases ______.
Poor banking habits limit credit creation by ______.
"Loans create deposits" means banks grant loans by ______.
