Question

If total deposit created by commercial banks is $Rs.20.000$ crores and the primary deposit is $Rs.2,500$ crores, what is the value of money multiplier and reserve ratio?

Answer 1

Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the commercial banks which they must have keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

Cash reserve ratio = (primary deposit / total deposit) x 100

= (2,500 / 20,000) x 100

= 12.5 %

Multiplier refers to the number of times the commercial banks multiplies the primary deposit in the credit creation process in order to create total deposits.

Multiplier = 1/ Cash reserve ratio

= 100 / 12.5

= 8 times