A bank receives a cash deposit of Rs 100 when the Cash Reserve Ratio is 20 per cent, and every loan it gives comes back to it as a deposit. Which of the following pairs is correctly matched?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Loan given in round 1 – Rs 80
With a CRR of 20 per cent, the bank keeps Rs 20 of the Rs 100 deposit and lends the remaining Rs 80.
Option (1) Required reserves in round 2 – Rs 20 — Incorrect. Round 2 deposits are Rs 180, so reserves are 20% of 180 = Rs 36.
Option (2) Loan given in round 1 – Rs 80 — Correct. 100 − 20 = Rs 80 is lent.
Option (3) Required reserves in round 1 – Rs 80 — Incorrect. Reserves in round 1 are 20% of 100 = Rs 20. Rs 80 is the loan.
Option (4) Total deposits in round 2 – Rs 160 — Incorrect. The Rs 80 loan returns as a deposit: 100 + 80 = Rs 180.
NCERT (2026-27): “3.3.2 Limits to Credit Creation and Money Multiplier … In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. … Thus our bank has Rs 80 (100 – 20) to lend and the bank lends out Rs 80 to Jaspal Kaur, which shows up in the bank’s deposits in the next round as liabilities, making a total of Rs 180 as deposits. Now our bank is required to keep 20 per cent of 180 i.e. Rs 36 as cash reserves. …” |