Question

Suppose money created by the banking system is ₹ 1,000 and the primary deposits is ₹ 250. The respective values of deposit multiplier and reserve ratio would be ______ and ______.

Options

• 4, 25%

• 8, 12.5%

• 4, 12.5%

• 5, 20%

Answer 1

Suppose money created by the banking system is ₹ 1,000 and the primary deposits is ₹ 250. The respective values of deposit multiplier and reserve ratio would be 4 and 25%.

Explanation:

Deposit multiplier = `"Total deposits"/ "initial deposits"`

= `(₹ 1,000)/(₹250)`

= 4

Cash reserve ratio is = `1/"deposit multiplier"xx 100`

= `1/4xx100`

= 25%