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Question
Suppose in an economy, the initial deposit of ₹ 400 crores lead to the creation of total deposits worth ₹ 4000 crore. Then the value of reserve requirements would be ______.
Options
0.01
1
0.1
0.21
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Solution
Suppose in an economy, the initial deposit of ₹ 400 crores lead to the creation of total deposits worth ₹ 4000 crore. Then the value of reserve requirements would be 0.1.
Explanation:
Money Multiplier = `1/"Reserve Ratio"`
Also, Money Multiplier = `"Total Deposits"/"Initial Deposit"`
Given:
Initial deposit = ₹400 crores
Total deposits = ₹4000 crores
Step 1: Calculate the Money Multiplier
Money Multiplier = `4000/400 = 10`
Step 2: Calculate the Reserve Requirement (Reserve Ratio)
Reserve Ratio = `1/"Money Multiplier" = 1/10 = 0.1`
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