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CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking

A bank receives a fresh cash deposit of ₹50,000. The cash reserve ratio is 10% and the bank lends out the entire remaining amount, which is redeposited fully in the banking system with no cash leakage. Assuming the same ratio applies at every stage, what is the maximum total increase in deposits created in the system, including the original deposit?

The maximum total deposits are ₹5,00,000. With a 10% cash reserve ratio, the deposit multiplier is 1 divided by 0.10, which is 10, and multiplying by the original ₹50,000 deposit gives ₹5,00,000 in total deposits, including the initial amount.

  1. A₹5,00,000Correct
  2. B₹4,50,000
  3. C₹5,000
  4. D₹50,00,000

Explanation

Money multiplier = 1/CRR = 1/0.10 = 10. Total deposits = 50,000 × 10 = ₹5,00,000. The ₹4,50,000 figure wrongly counts only the new credit created and omits the original deposit, so it is not total deposits.

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