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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’?
Answer the following question.
What role does it play in determining the credit creation power of the banking system? Use a numerical illustration to explain.
______ is the main source of money supply in an economy.
Credit creation by the commercial bank is determined by ______.
The process of money creation or credit creation is done by ______.
Match the following and select the correct option.
| Column A | Column B | ||
| (i) | A deposit created by a customer | A. | Term deposit |
| (ii) | A deposit created by bank when loan is granted | B. | Demand deposits |
| (iii) | Deposits payable by bank on demand | C. | Initial deposit |
| (iv) | Deposits the amount of which can be withdrawn only after a fixed period of time | D. | Secondary deposit |
To ensure that the citizens of the country have faith in the currency, the currency is issued by:
Match the following:
| Column I | Column II | ||
| A. | Formula of Money Multiplier | (i) | Inverse |
| B. | Money multiplier = 4 | (ii) | Money multiplier = 10 |
| C. | Relationship between LRR and money multiplier | (iii) | LRR = 0.25 |
| D. | LRR = 0.1 | (iv) | `1/"LRR"` |
Why are the banks required to keep only a fraction of deposits as cash reserves?
A T-account shows that a ₹10,000 cash deposit increases ______.
