As in NCERT’s money multiplier process, there is only one bank, every loan comes back to it as a deposit and the public holds no currency. Ms Iyer deposits Rs 200 in the bank, which keeps it as reserves. The Cash Reserve Ratio is 50 per cent, and the bank lends all its excess reserves. What are the total loans given by the bank by the end of Round 2, and the total loans when the process ends?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 150 and Rs 200
Given:
Initial deposit = Rs 200
CRR = 50 per cent
In each round the bank keeps 50 per cent of the new deposit as reserves and lends the rest; the loan comes back as a new deposit. Deposits and reserves are counted as running totals: each round adds to the totals of the round before.
Round 1:
Deposits = 200
Reserves = 100
Loan = 200 − 100 = 100
Round 2 (the loan of 100 comes back):
Total deposits = 200 + 100 = 300
Total reserves = 150
New loan = 50
\( \displaystyle \text{Total loans by the end of Round 2} = 300 - 150 = 150 \; (100 + 50) \)
When the process ends:
\( \displaystyle \text{Total deposits} = 200 \times \frac{1}{0.5} = 400 \)
\( \displaystyle \text{Total loans} = 400 - 200 = 200 \)
Loans are Rs 150 by the end of Round 2 and Rs 200 in all.
Rs 400 is total deposits, not loans: the reserves of Rs 200 stay with the bank.
NCERT (2026-27): “Table 3.2: 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 per cent 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.” “3.3 Money Creation by Banking System Since the bank is only expected to keep 20 per cent of its deposits as reserves, thus, reserves of Rs 100 (20per cent of 500 = 100) can support the deposits of Rs 500. In other words, our bank can give a loan of Rs 400. Table 3.3 demonstrates its balance sheet. M1 = Currency + Deposits = 0 + 500 = 500 Thus, money supply increases from Rs 100 to Rs 500. Given a CRR of 20 per cent, the bank cannot give a loan beyond Rs 400. Hence, requirement of reserves acts as a limit to money creation.” |