CA Foundation · Business Economics · Money Market
Banks in an economy have a required reserve ratio of 10%, and the public holds no cash (all money is redeposited). The central bank injects ₹500 crore of fresh reserves through open market purchases. Assuming banks lend out all excess reserves, the maximum potential increase in total deposits is:
The maximum potential increase in deposits is ₹5,000 crore. With a 10 percent reserve ratio the money multiplier is 1 divided by 0.10, which equals 10, and multiplying the ₹500 crore reserve injection by 10 gives the total possible deposit expansion.
- A₹50 crore
- B₹450 crore
- C₹5,000 croreCorrect
- D₹4,500 crore
Explanation
The money multiplier is 1/reserve ratio = 1/0.10 = 10. Maximum increase in deposits = 500 × 10 = ₹5,000 crore. ₹4,500 crore is the amount of new lending beyond the first injection, and ₹50 crore wrongly multiplies by the ratio instead of dividing.
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