If the required reserve ratio in an economy is 12.5%, the initial cash deposits of ₹2000 will increase the money supply by ____.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → ₹16000
Required Reserve Ratio (RRR) = 12.5% = 0.125
Initial cash deposit = ₹2000
Money Multiplier=1 / Required Reserve Ratio (RRR)
= 1 / 0.125 = 8
Total Money Supply=Initial Deposit × Money Multiplier
= 2000 * 8 = 16,000