CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking
A bank has received a fresh deposit of Rs 50,000 and the cash reserve ratio is 20%, with no other leakages. What is the maximum total amount of deposits that can ultimately be created in the banking system from this initial deposit?
The maximum total deposits are Rs 2,50,000. The deposit multiplier is 1 divided by the reserve ratio of 0.20, which equals 5, and multiplying the initial deposit of Rs 50,000 by 5 gives Rs 2,50,000 in total deposits.
- ARs 1,00,000
- BRs 2,50,000Correct
- CRs 10,000
- DRs 2,00,000
Explanation
The money multiplier = 1/CRR = 1/0.20 = 5. Total deposits = 50,000 x 5 = Rs 2,50,000. Rs 2,00,000 is wrong because it is only the new credit created (2,50,000 - 50,000), excluding the initial deposit.
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