CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking
In the banking system, the statutory reserve requirement is 12.5% of deposits and customers hold no cash outside banks. A bank receives a fresh deposit of Rs 2,00,000 and the entire system lends out its excess reserves fully at each stage. By how much does the total credit created (excluding the initial deposit) amount to?
Credit created is Rs 14,00,000. The multiplier is 1/0.125 = 8, so total deposits become Rs 16,00,000. Subtracting the original Rs 2,00,000 deposit leaves Rs 14,00,000 as the new credit created by the banking system.
- ARs 14,00,000Correct
- BRs 16,00,000
- CRs 2,00,000
- DRs 18,00,000
Explanation
Multiplier = 1/0.125 = 8. Total deposits = 2,00,000 x 8 = Rs 16,00,000. Credit created excluding the initial deposit = 16,00,000 - 2,00,000 = Rs 14,00,000. Rs 16,00,000 is wrong because it includes the original deposit.
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