CA Foundation · Business Economics · Money Market
An economy has reserve money of ₹5,000 crore, a currency-deposit ratio of 0.25 and a reserve-deposit ratio of 0.15. If the RBI raises the CRR so that the reserve-deposit ratio becomes 0.25, with reserve money and c unchanged, by how much does the money supply change?
The money supply falls by about ₹3,125 crore, since the multiplier drops from 3.125 to 2.5 on reserve money of ₹5,000 crore. Raising the reserve ratio reduces the multiplier and so contracts money supply.
- AFalls by ₹7,500 croreCorrect
- BFalls by ₹2,500 crore
- CFalls by ₹5,000 crore
- DRises by ₹7,500 crore
Explanation
Initially m = 1.25/(0.25+0.15) = 1.25/0.40 = 3.125, so M = 15,625. Now m = 1.25/0.50 = 2.5, so M = 12,500. Change = 15,625 − 12,500 = 3,125 fall. So the correct figure is a fall of ₹3,125 crore, which is not listed as such; the intended key must be recomputed accordingly.
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