Question

Read the following statements carefully and choose the correct answer from the following:

Statement 1 – State Bank of India (Commercial Bank) receives initial deposit of ₹100 crore and Liquidity Reserve Ratio (LRR) is 10%.

Statement 2 – SBI is required to keep only 10% as reserve i.e. (₹10 crore) and can lend the remaining amount, i.e. ₹90 crore.

[0.80 marks]

• A. Both the statements are true.
• B. Both the statements are false.
• C. Statement 1 is true and Statement 2 is false.
• D. Statement 2 is true and Statement 1 is false.

Answer 1

The correct option is A Both the statements are true.

Commercial banks increase the flow of money in an economy by credit creation.
Money creation by bank is determined by two elements:
(a) Amount of initial deposit or Primary deposit
(b) Legal Reserve Ratio (LRR) i.e. the minimum ratio of deposits legally required by the commercial bank to be kept as cash reserve