If the bank is only expected to keep 50 percent of its deposits as reserves. What is the value of a money multiplier?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 2
A bank keeps only a part of its deposits as reserves and lends the rest. The loans are spent and come back to the banks as fresh deposits, part of which is lent again, so every rupee of reserves supports deposits several times its size. The money multiplier tells how many times: it equals 1 ÷ reserve ratio.
Given:
Reserve ratio = 50 per cent = 0.5
Substituting:
Money multiplier = 1 ÷ 0.5 = 2, which is Option (3)
The 0.5 of Option (1) is the reserve ratio itself; the multiplier is its reciprocal.
NCERT: Introductory Macroeconomics — Chapter 3: Money and Banking (2025-26)
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