CBSE 2025, Compartment, Set 1

Question

Suppose in a hypothetical economy, reserve ratio changes from 10% to 20% and the value of primary deposits are ₹1,000 crore.
Calculate the change in the amount of money creation when reserve ratio changes from 10% to 20%.

Edvaya · Accepted Answer

The correct answer is Subjective. The total money creation by the banking system is calculated as: $	ext{Primary Deposits} 	imes 	ext{Money Multiplier}$, where Money Multiplier = $\frac{1}{	ext{Reserve Ratio (RR)}}$. **Case I: When Reserve Ratio (RR) = 10% (0.1)** Money Multiplier = $\frac{1}{0.1} = 10$ Total Amount of Money Creation = $1,000 	imes 10 = ₹10,000 	ext{ crore}$. **Case II: When Reserve Ratio (RR) = 20% (0.2)** Money Multiplier = $\frac{1}{0.2} = 5$ Total Amount of Money Creation = $1,000 	imes 5 = ₹5,000 	ext{ crore}$. **Change in the amount of money creation:** The total money creation heavily falls from ₹10,000 crore to ₹5,000 crore. Decrease in money creation = $10,000 - 5,000 = ₹5,000 	ext{ crore}$.

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Economics > Introductory Macroeconomics > Money And Banking

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