IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system
A bank receives a fresh deposit of Rs 10,00,000. Banks in the system hold reserves of 10% of deposits, there is no cash leakage and banks lend out all excess reserves. What is the maximum total increase in deposits, including the original deposit?
The maximum total increase in deposits is Rs 1,00,00,000. With a 10% reserve ratio the multiplier is ten, so the initial Rs 10,00,000 deposit supports ten times as many deposits, including the original one.
- ARs 1,00,000
- BRs 9,00,000
- CRs 10,00,000
- DRs 90,00,000
- Rs 1,00,00,000Correct
Explanation
The money multiplier is 1/0.10 = 10. Total deposits rise by 10 x Rs 10,00,000 = Rs 1,00,00,000. Rs 90,00,000 is the amount of new lending-created deposits excluding the original deposit, so it is wrong because the question includes the original deposit.
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