A bank has deposits of Rs 1,000, reserves of Rs 150 and loans of Rs 850. The Cash Reserve Ratio is 10 per cent, and every loan the bank gives comes back to it as a deposit. By how much more can the bank increase its loans?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 500
Given:
Reserves = Rs 150
Deposits = Rs 1,000
Loans = Rs 850
CRR = 10 per cent
Deposits the reserves can support = reserves ÷ CRR
= 150 ÷ 0.10 = Rs 1,500
Room for more deposits = 1,500 − 1,000 = Rs 500
Every new loan comes back as a new deposit. So loans can rise by Rs 500, to Rs 1,350.
Check: reserves 150 + loans 1,350 = 1,500 = deposits.
Rs 50 is only the excess reserves (150 − 10% of 1,000). The bank lends many times this amount because loans return as deposits.
NCERT (2026-27): “3.3.2 Limits to Credit Creation and Money Multiplier … 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. |