What will be the amount of initial reserves if Cash Reserve Ratio (CRR) is 20% and total credit creation is ₹500?
Answer & explanation
Correct answer: option 4
Money multiplier =$\frac{ 1}{CRR}$
Thus, according to the question, initial reserves will be:
Money multiplier (k) = \(\frac{ 1}{\text{20%}}\) = 5
Thus, credit creation will be 5 times the inital reserves.
Credit creation = 500 (given) or 5 times initial reserves i.e. 5 (initial reserves)
Therefore, initial reserves = $\frac{ 500}{5}$= ₹100