Prof. Sushma Gupta

Question

A single commercial bank has total primary deposits of **₹5,00,000** and the CRR is **20%**. What is the maximum initial amount this specific bank can directly lend? A). ₹1,00,000 B). ₹4,00,000 C). ₹5,00,000 D). ₹25,00,000

Edvaya · Accepted Answer

The correct answer is ₹4,00,000. **Answer: ₹4,00,000** **Step 1:** Calculate the mandatory Cash Reserve: $	ext{Cash Reserve (CRR)} = 	ext{Total Deposits} 	imes 20\% = 	ext{₹5,00,000} 	imes 0.20 =$ **₹1,00,000** **Step 2:** Calculate the remaining amount available for direct lending: $	ext{Amount available for lending} = 	ext{Total Deposits} - 	ext{Cash Reserve} = 	ext{₹5,00,000} - 	ext{₹1,00,000} =$ **₹4,00,000** > *Note:* If the question asked for the *total credit created by the entire banking system* via the multiplier, it would be $	ext{₹5,00,000} 	imes 5 =$ **₹25,00,000**. However, the capacity for the *first individual bank* is restricted to its initial deposit minus the CRR deduction.

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Economics > Introductory Macroeconomics > Money And Banking

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