Suppose in an economy, the legal Required ratio fixed by the Central Bank is 20% and the value of initial deposits is Rs.1000 crores. What is the value of loans extended by Commercial Banks?

Rs.4000 crores   

Money multiplier =$\frac{ 1}{CRR}$

Money multiplier (k) = \(\frac{ 1}{\text{20%}}\) = 5

Thus, according to the question, reserves of Rs 1000cr can create deposits of Rs 5000 Cr (5 times).

Since the bank is only expected to keep 20 percent of its deposits as reserves, thus, reserves of Rs 1000 cr (20per cent of 5000 cr = 1000 cr) can support the deposits of Rs 5000 cr. In other words, the bank can give a loan of Rs 4000 cr only.

Thus, with a LRR (Legal reserve Ratio) of 20 per cent, the bank cannot give a loan beyond Rs 4000 crores i.e (Rs5,000-1,000cr)