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CA Foundation · Business Economics · Money Market

In the RBI's framework, the money multiplier is defined as the ratio of which two quantities?

The money multiplier is the ratio of broad money (M3) to reserve money, also called high-powered money. It shows how many rupees of total money supply are created from each rupee of reserve money held by the monetary base.

  1. AReserve money to broad money (M3)
  2. BBroad money (M3) to reserve moneyCorrect
  3. CNarrow money (M1) to broad money (M3)
  4. DCurrency with the public to total bank deposits

Explanation

The money multiplier shows how many rupees of money supply are created per rupee of reserve money (high-powered money). So it equals M3 divided by reserve money. Option A is the inverse of this ratio, so it is wrong.

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