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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
Do you consider a commercial bank ‘creator of money’ in the economy’?
The creation of ______ is called credit creation.
Credit creation by the commercial bank is determined by ______.
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.
What could be the main reason for the institutionalization of Community Based Repayment Mechanisms (CBRMs)?
Deposits made by the people from their own resources are called ______.
The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called ______.
Explain briefly the process of credit creation by commercial banks.
A T-account shows that a ₹10,000 cash deposit increases ______.
"Loans create deposits" means banks grant loans by ______.
