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Questions
What is a credit multiplier?
What is credit multiplier (deposit multiplier)?
Short Answer
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Solution
The credit multiplier refers to the ability of the banking system to create a multiple amount of credit (deposits) from a given initial amount of reserves.
It shows how much total credit or money the commercial banks can generate with the help of initial reserves, based on the required reserve ratio (RR) set by the central bank.
Formula:
Credit multiplier = `1/"Required Researve Ratio (RR)"`
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