Suppose, in a hypothetical economy, the cash reserve ratio is 20% and initial deposits are Rs.100. The value of money which a bank can use to give as a loan in the first round would be
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 80
In a fractional reserve banking system, banks are required to keep a certain percentage of their deposits as reserves with the central bank. This percentage is called the Cash Reserve Ratio (CRR).
Given:
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Initial deposits = Rs. 100
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CRR = 20%
This means the bank must keep 20% of Rs. 100 = Rs. 20 as reserves and can use the remaining Rs. 80 for lending in the first round.