Question

a. What is a money multiplier?
b. Calculate the value of money multiplier and total deposit created if initial deposit is Rs 500 crores and LRR is 10%.

Answer 1

Dear Student,

(a) Money Multiplier is defined as the stock of money (M_S) to the stock of high powered money (H). It shows the number of times the total deposits have increased from the initial deposits of money.

​​​​​​(b) Money Multiplier = 1/LRR which is equal to 1/0.1 = 10 Initial Deposit = Rs.500 crores
​​​​​​​Total Deposit = Initial Deposit x money multiplier = 500 x 10 = Rs. 5000 crores

Regards.