Suppose there is a fresh deposit of Rs. 10,000 in banks and cash reserve ratio is 0.5. How much is total deposit creation?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → 20,000
The formula for the money multiplier is: Money Multiplier = 1 / Cash Reserve Ratio (CRR)
Given:
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Fresh Deposit = Rs. 10,000
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Cash Reserve Ratio (CRR) = 0.5
Money Multiplier = 1 / 0.5 = 2
Total Deposit Creation = Fresh Deposit × Money Multiplier
Total Deposit Creation = Rs. 10,000 × 2 = Rs. 20,000