Money Multiplier Process

The first column lists each round. The second column depicts the total deposits with the Bank at the beginning of each round. Twenty percent of these deposits need to be deposited with the RBI as required reserves (column 3). What the Bank lends in each round gets added to the deposits with the bank in the next round. Column 4 indicates the Loans made by the banks.

What is the total credit created if CRR is 20% and the initial deposit is ₹200 ?

1000

The correct answer is option (1) : 1000

To calculate the total credit created, we need to follow the money multiplier process. The formula for the money multiplier is given by :

Money multiplier = $\frac{1}{CRR}$

In this case, the Cash Reserve Ratio (CRR) is 20%, so the Money Multiplier is :

Money Multiplier = $\frac{1}{0.2}= 5 $

Now, to find the total credit created, we multiply the initial deposit by the Money Multiplier :

Total Credit Created = Initial Deposit. $\frac{1}{\text{money multiplier}}$

Total Credit Created = 200 * 5 = 1000