Goldsmith Lala holds 100 kg of gold deposited by the villagers and has issued paper receipts for all of it. He lends 25 kg of gold to Ramu. Ramu pays Ali with this gold, and Ali keeps it with Lala in return for a paper receipt. How much gold do the paper receipts acting as money now represent?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 125 kg
Given:
Gold deposited and covered by receipts = 100 kg
Gold lent to Ramu, paid to Ali and deposited again = 25 kg
Ali gets a new receipt, while the old receipts stay in use. So the receipts acting as money add up.
Receipts = 100 + 25 = 125 kg
Lala has created money by lending, just as banks do.
NCERT (2026-27): “Commercial Banks … Now, let us suppose that Lala had 100 Kgs of gold, deposited by different people and he had issued receipts corresponding to 100 kgs of gold. At this time Ramu comes to Lala and asks for a loan of 25 kgs of gold. … However, Lala could decide that everyone with gold deposits will not come to withdraw their deposits at the same time and so he may as well give the loan to Ramu and charge him for it. If Lala gives the loan of 25 kgs of gold, Ramu could also pay Ali with these 25 kgs of gold and Ali could keep the 25 kgs of gold with Lala in return for a paper receipt. In effect, the paper receipts, acting as money, would have risen to 125 kgs now. It seems that Lala has created money out of thin air!” |