Given a cash reserve ratio of 20 percent, reserves of Rs 100 create deposits of _____.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 500
The money multiplier (deposit multiplier) shows how much total deposits can be created with a given amount of reserves.
Money Multiplier=1 / Cash Reserve Ratio (CRR)
CRR = 20% = 0.20
Money Multiplier= 1 / 0.2 = 5
So, with reserves of Rs 100: Total Deposits=100×5=500