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Supply of Money and Money Multiplier for CA Foundation Business Economics

Updated 1 October 2026 · Fact-checked

Money supply is the total stock of money held by the public. It depends on high-powered money (H), which the central bank creates, and the money multiplier (m), set by banks and the public. Money supply = m × H. Under the simple model, m = 1 ÷ CRR. Solve by finding H, then m, then multiplying.

Understand Supply of Money and Money Multiplier

Money supply is the stock of money held by the public at a point in time. It excludes cash held by the central bank and by banks themselves. Money supply is a stock, not a flow.

The central bank (RBI) and the banking system together determine it. The RBI controls the base. Commercial banks and the public decide how much of that base turns into deposits.

High-powered money (H), also called reserve money or monetary base, is the money issued by the RBI. It consists of currency held by the public, cash held by banks, and banks' deposits with the RBI. It is called high-powered because each rupee of it supports several rupees of money supply.

The money multiplier (m) is the ratio of money supply to high-powered money. Banks must keep a fraction of deposits as reserves (the Cash Reserve Ratio, CRR). They can lend the rest. The loan returns to the banking system as a new deposit, and the process repeats. A smaller reserve ratio means a larger multiplier.

The multiplier falls if the public holds more cash instead of depositing it (a higher currency-deposit ratio), or if banks keep extra reserves. So money supply depends on four things: the RBI's high-powered money, the reserve ratio, the public's currency-holding habit, and banks' lending behaviour.

Key formulas to remember

Money supply
M = m × H
M is money supply, m is the money multiplier, H is high-powered money.
Money multiplier
m = M ÷ H
Ratio of money supply to high-powered money.
Simple deposit multiplier
m = 1 ÷ CRR
Use when the public holds no cash and banks keep only the required reserve. CRR must be in decimal form, e.g. 10% = 0.10.
Multiplier with currency holding
m = (1 + c) ÷ (c + r)
c = currency-deposit ratio, r = reserve-deposit ratio. Use only when both ratios are given.
Total deposits from an initial deposit
Total deposit creation = Initial deposit × (1 ÷ CRR)
Assumes full lending and no cash leakage. New credit created = total deposits − initial deposit.
High-powered money
H = Currency held by public + Bank reserves (cash in hand + deposits with RBI)
Also called reserve money or monetary base.

How to solve Supply of Money and Money Multiplier questions

Use this order for any numerical or conceptual question on money supply and the multiplier.

  1. 1Read what is asked: money supply, multiplier, high-powered money, or new credit created.
  2. 2Write down the given values and convert percentages to decimals (CRR 8% = 0.08).
  3. 3Check the assumptions. If only CRR is given and no cash leakage is mentioned, use m = 1 ÷ CRR.
  4. 4If currency-deposit ratio c and reserve ratio r are both given, use m = (1 + c) ÷ (c + r).
  5. 5Calculate the multiplier first, then multiply by H to get M (or divide M by m to get H).
  6. 6For deposit creation questions, decide whether the answer wants total deposits or only new loans (total minus initial).
  7. 7Check the units and the direction: a higher CRR must lower the multiplier.
  8. 8Match your result to exactly one option.

Quickest way: Reciprocal shortcut with option elimination

When to use it: Use for MCQs that give CRR (or a reserve ratio) and ask for the multiplier, money supply or deposit creation.

  1. Turn CRR into a reciprocal: 10% gives 10, 20% gives 5, 25% gives 4, 5% gives 20, 12.5% gives 8.
  2. Multiply the reciprocal by the base amount (H or initial deposit).
  3. Eliminate any option where the multiplier is less than 1 or where a higher CRR gives a bigger answer.
  4. If the question asks for new credit, subtract the initial deposit at the end.
  5. If c and r are given and the algebra looks long, plug in the numbers directly: add 1 to c for the top, add c and r for the bottom.
  6. If a question is taking too long, mark it and return after finishing the rest.

Common mistakes in Supply of Money and Money Multiplier

  • Using CRR as 10 instead of 0.10 in 1 ÷ CRR.

    Students copy the percentage figure straight into the formula.

    Fix: Convert to a decimal first, or use the reciprocal: 1 ÷ 10% = 10.

  • Treating money supply and high-powered money as the same thing.

    Both are called money and both involve the RBI.

    Fix: Remember H is the base created by the RBI. M = m × H is larger because banks multiply it.

  • Giving total deposits when the question asks for new credit created.

    Students stop after multiplying by the multiplier.

    Fix: New credit = total deposit creation − initial deposit. Read the last line of the question.

  • Thinking a higher CRR increases the money multiplier.

    Confusing a higher reserve with higher money.

    Fix: Higher CRR means banks lend less, so the multiplier falls. m moves opposite to CRR.

  • Ignoring currency held by the public when it is given.

    Students memorise only m = 1 ÷ CRR.

    Fix: If a currency-deposit ratio appears, use m = (1 + c) ÷ (c + r). The simple formula is the upper limit.

  • Including cash held by banks or the RBI in money supply.

    Students treat all cash in the economy as money supply.

    Fix: Money supply counts only money held by the public. Bank vaults and the central bank's own holdings are excluded.

Worked examples

Example 1

The CRR is 20%. If the RBI creates high-powered money of ₹500 crore and the simple multiplier applies, the money supply is: (a) ₹1,000 crore (b) ₹2,500 crore (c) ₹100 crore (d) ₹10,000 crore

Show the solution
  1. Convert CRR: 20% = 0.20.
  2. Multiplier m = 1 ÷ 0.20 = 5.
  3. Money supply M = m × H = 5 × 500 = ₹2,500 crore.
  4. Check: ₹100 crore and ₹1,000 crore are too small for a multiplier of 5 on ₹500 crore.

Answer: (b) ₹2,500 crore

Example 2

A person deposits ₹10,000 in a bank. The CRR is 10% and banks lend out all excess reserves, with no cash leakage. The total new credit created in the banking system is: (a) ₹1,00,000 (b) ₹90,000 (c) ₹10,000 (d) ₹9,000

Show the solution
  1. Multiplier = 1 ÷ 0.10 = 10.
  2. Total deposits created = 10,000 × 10 = ₹1,00,000.
  3. New credit = total deposits − initial deposit.
  4. New credit = 1,00,000 − 10,000 = ₹90,000.

Answer: (b) ₹90,000

Example 3

The currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. The money multiplier is: (a) 10 (b) 4 (c) 3 (d) 5

Show the solution
  1. Use m = (1 + c) ÷ (c + r).
  2. Numerator: 1 + 0.2 = 1.2.
  3. Denominator: 0.2 + 0.1 = 0.3.
  4. m = 1.2 ÷ 0.3 = 4.
  5. Check: the simple multiplier 1 ÷ 0.1 = 10 is higher, as expected when the public holds cash.

Answer: (b) 4

Exam tips

  • Questions are usually either a one-line calculation with CRR or a conceptual statement. Learn both m = 1 ÷ CRR and m = (1 + c) ÷ (c + r).
  • Read whether the question asks for total deposits, new credit, money supply or the multiplier. Options often include the wrong ones as traps.
  • For concept questions, remember that H is created by the RBI, and the multiplier depends on the CRR, the public's cash habit and banks' excess reserves.
  • With 0.25 negative marking, guess only after you remove options that violate direction: a higher CRR cannot raise the multiplier.
  • Revise this alongside the measures of money supply (M1 to M4), since questions often mix the two.

Practice questions from Money Market

Supply of Money and Money Multiplier: frequently asked questions

What is high-powered money in Business Economics?

High-powered money is the monetary base issued by the RBI. It includes currency held by the public and the reserves of banks. It is called high-powered because it supports a larger money supply through the banking system.

How do you calculate the money multiplier with CRR?

In the simple case, divide 1 by the CRR in decimal form. For a CRR of 10%, m = 1 ÷ 0.10 = 10. Multiply this by high-powered money to get the money supply.

What are the determinants of money supply?

The main determinants are the high-powered money created by the RBI, the reserve ratio (CRR) that banks must maintain, and the public's preference for holding cash versus deposits. Banks' willingness to lend also matters.

Why is the actual multiplier lower than 1 ÷ CRR?

People hold some money as cash and banks may keep excess reserves. Both reduce the amount that returns to the banking system as deposits. This is why the formula with the currency-deposit ratio gives a smaller value.